CIHM 

Microfiche 

Series 

(l\/lonographs) 


ICMH 

Collection  de 

microfiches 

(monographies) 


Canadian  Instituta  for  Hiatorieai  Microraproductiont  /  Institut  Canadian  da  microraprodMCtiona  historiquas 


Technical  and  Bibliographic  Notes  /  Notes  techniques  et  bibllographiques 


The  Institute  has  attempted  to  obtain  the  best  original 
copy  available  for  filming.  Features  of  this  copy  which 
may  b«  bibliographically  unique,  which  may  alter  any  of 
the  images  in  the  reproduction,  or  which  may 
significantly  change  the  usual  method  of  filming  are 
checked  btloM 


Coloured  covers  / 
Couvtfture  dn  couleur 


□ 

□ Covers  damaged  / 
Couvtftiff*  •ndommagte 

□ Covers  restored  and/or  laminated  / 
Couveiture  restaur^*  tlUou  peKeutfe 

Cover  thie  missing  /  Le  tHre  de  couvedure  manque 

Coloured  maps  /  Cartes  gtographiques  en  couleur 


Coloured  ink  (i.e.  other  than  blue  or  black)  / 


□  Encre  de  couleur  (Le.  autre  que  bleue  ou  noire) 

□ Coloured  plates  and/or  illustrations  / 
Planches  et/ou  illustrations  en  couleur 


□ 
□ 
□ 


□ 


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Relid  avec  d'autres  documents 

Only  edition  available  / 
Seule  Edition  disponible 

Tight  binding  may  cause  shadows  or  distortion  along 
interior  margin  /  La  reliure  serrie  peut  causer  de 
romi»«  ou  de  la  distorsion  le  long  de  l«  marge 
inlMeure. 

Blank  leave*  added  durftig  restoratkms  may  a^ar 

within  the  text.  Whenever  possible,  these  have  been 
omitted  from  filming  /  II  se  peut  que  certaines  pages 
blanche*  ajout***  lor*  d'une  rcetauration 
apparaissent  dans  le  texte.  mais,  lorsque  cela  4tatt 
possible,  ces  pages  n'ont  pas  i\i  tilm^es. 


L'Institut  a  microfilm^  le  meiileur  txemplair*  qu'il  lui  a 
6\i  possible  de  se  procurer.  Le*  detail*  d*  cet  exem- 
plaire  qui  sont  peut-^tre  uniques  du  point  de  vue  bibli- 
ographique,  qui  peuvent  modifier  une  inuge  reproduite, 
ou  qui  peuvent  exiger  unt  modifieation  dans  la  m<tho- 
dt  nomiait  da  fHmag*  sont  indk}ute  dKtessous. 

I    I  Cotoured  pages  /  Pages  de  couleur 

I    \  Pages  danwged/ Pages  endommagies 

□ 


Pages  restored  and/or  laminated  / 
Pages  restauries  et/ou  pellicul^es 


0 Pages  discoloured,  stained  or  foxed  / 
Pages  dteolortes,  tacheties  ou  pk)uies 

I    I  Pages  detached/Pages  d<tacM*s 

[7]  Showthrough/ Transparence 

□ 


□ 
□ 


□ 


Quality  of  print  varies  / 
QuaBM  inigals  de  Hmpresston 

includes  supf^emcntary  material  / 
Comprend  du  materiel  suppKmenlaire 

Pages  wholly  or  partially  obscured  by  errata  sl^s, 
tissues,  etc.,  have  been  refilmed  to  ensure  the  best 
possible  Image  /  Les  pages  totatement  ou 
partiellement  obscurcies  par  un  feuillet  d*errata,  une 
pekm.  etc..  orA  M  flknies  k  nouveau  de  fa9on  k 
oMer^  ia  meSeura  image  poss^. 

Opposing  pages  with  varying  colouration  or 
discolourations  are  filmed  twice  to  ensure  the  best 
possible  image  /  Les  pages  s'opposant  ayant  des 
colorations  variables  ou  des  dteotorationa  sont 
f ilm^es  deux  fbis  afin  d'obier^  ia  meWeure  imaga 
possible. 


Additional  comments  / 
Commentaires  suppi^mentaires: 


Varlom  pagfnas. 


This  htm  it  f ilmid  >t  iht  rtducllon  ratio  chicktd  bttow  / 

Ct  documant  ttt  fSmi  au  taux  da  rMwtlen  tfktf  qirf  e}>d«*<eut. 


lOx 


14x 


18x 


22x 


9^ 


12x 


16x 


20x 


26x 


30x 


24x 


2ax 


32x 


Th«  copy  filmed  h«r«  hM  bMn  raprodueMi  thaniM 
to  the  a«n«rosity  of: 


Univanity  of  Albwta 
Edmonton 

Th«  imagoa  appoaring  hora  ara  tfia  bast  quality 
poMibIa  eonsidaring  tfta  condition  and  lagibility 
of  tho  original  copy  and  in  kaaping  with  ttta 
filming  contract  ■pacifications. 


Original  copies  in  printed  paper  covers  are  filmed 
beginning  with  the  front  cover  and  ending  on 
the  last  page  with  a  printed  or  illustrated  impree- 
sion,  or  the  baelt  cover  when  appropriate.  AN 
other  original  copies  are  filmed  beginning  on  tha 
first  page  with  a  printed  or  llluatratad  Impree- 
sion.  and  ending  on  the  laat  page  with  a  printed 
or  illustrated  impression. 


The  last  recorded  frame  on  each  microfiche 
shall  contain  tha  symbol       (meaning  "CON- 
TINUED"!, or  tha  symbol  ▼  (moaning  "END"), 
whichever  applies. 

Maps,  plates,  charts,  etc..  may  be  filmed  at 
different  reduction  ratios.  Those  too  large  to  be 
entirely  included  in  one  exposure  are  filmed 
beginning  in  the  upper  left  hand  corner,  left  to 
right  and  top  to  bottom,  as  many  frames  as 
required.  The  following  diagrama  illuatrata  tha 
method: 


L'exemplaira  fiim4  fut  raproduit  grica  i  !• 
g*n4foait«  da: 


Univwiity  of  Albsrts 
Edmonton 

Las  images  suivantas  ont  M  raproduites  avec  le 
plus  grand  soin.  compta  tenu  de  la  condition  at 
da  la  netteta  de  rexemplaire  filma,  et  en 
conformity  avec  lea  conditions  du  contrat  da 
fUmaga. 

Las  exemplaires  originaux  dont  la  couvenure  en 
papier  est  imprimae  sont  filmas  en  commenpant 
par  la  premier  plat  et  en  terminant  soit  par  la 
darniira  page  qui  cemporta  una  amprainta 
d'impression  ou  d'lHustration,  soit  par  le  second 
plat,  salon  le  cas.  Tous  las  autres  exemplaires 
originaux  sont  filmas  en  commencant  par  le 
premiare  page  qui  comporte  une  empreinte 
d'impression  ou  d'illustratlon  et  en  terminant  par 
la  darnlAre  page  qui  comporta  una  taila 
amprainta. 

Un  das  symbolas  suivants  apparaitra  sur  la 
damiira  image  da  cheque  microficha,  salon  la 
cas:  la  symbols  — signifie  "A  8UIVRE".  la 
symbols  ▼  signifie  "FIN". 

Les  cartas,  planchaa.  tableaux,  etc..  peuvant  Mra 
filmte  h  das  taux  da  rMuction  diffirants. 
Lorsque  le  document  est  trop  grand  pour  dtre 
reproduit  en  un  seul  clich*,  il  est  filmb  a  partir 
da  Tangle  supdrieur  gaudia.  da  gauche  k  droita. 
et  de  Itaut  en  baa.  an  prenant  le  nombre 
d'imagas  nteessaira.  Lee  diagrammas  suivanta 
Utuatrom  la  m*thoda. 


1 


1 


1 

2 

3 

4 

5 

6 

MICROCOPV  RISOIUTION  TBT  CHART 

(ANSI  and  ISO  TEST  CHART  No.  3) 


^    /1PPLIED  IN/MGE  Inc 

gr.       1653  East  Main  Strtet 

RochMter.  Neo  York      14609  USA 
-=      (716)  482  -OMO-Phon* 
=      (716)  288  -  5989  -  rax 


ELEMENTARY  FRINCIFLES  OF  EOC»^MICS 


THI  MACMILLAN  COMPAMT 
■*w  voMc  •  lorroii  •  ancAoa 
OAUAt  •  SAM  nuMaaco 

MACMILLAN  ft  CO..  LiMtnB 

LOMDON  •  MMBAV  •  CAIGVITA 
MBLMOm 

rat  MArMiT  f  AW  eg  or  camada.  to» 


ELEMENTARY  PRINCIPLEsV^i^- 


ECONOMICS 


IRVING  FISHER 


OF  FOLrqCAL 

VALB  umvsMiTr 


THE  MACMILLAN  COMPANY 
1919 


0/ 


CwiMBT,       am,  Hta, 
Bv  m  MACllILLAir  OOMfflAinr, 


to 

THS  klKMORY  OF  MY  FRIKNO 
AND  COLLEAOUB 
PSOmSOR  LBTIR  W.  MKTMAM 


PREFACE 


Fat  IkAcnn 

Tme  wofdi  "EkBMBtaiy  T>rinciples"  in  the  tHle  of  tUi 
book  indicate  the  limitt  of  itt  scope  ;  the  book  is  intended 
to  be  demerUary,  not  advanced,  and  conooBU  ttnlf  with 
economic  principlts,  not  their  ai^lirations. 

Fint,  Mug  elementuy,  it  does  ^sot  attempt  to  imftvd 
the  most  difficult  taught  of  economic  theory  or  to  intr»> 
duce  controversial  matter.  ■  For  such  studies  it  should  be 
succeeded  by  more  extensive  treatises  (e.g.,  my  own :  Nakm 
of  Capita  tmi  Iitcom,  Metk$maiied  InvesHgaHom  in  lk$ 
Theory  of  Vahte  otid  Prices,  Purchasing  P&mt  Mtmyt 
and  Rate  of  Interest,  which  follow  out  the  same  general 
system  of  thought  and  ezpositicm  as  adopted  in  this  book^. 

Secondly,  bciif  devoted  to  prbc^les,  the  book  is  con- 
fined to  part  or  aspect  of  economics  wlilch  it  noir 
coming  to  be  recognized  as  capable  of  scientific  treatment 
in  the  sense,  for  instance,  in  which  that  term  may  be  ap 
plied  to  phyrici  or  Uotogy.  Tht  fundamental  distinction 
of  ft  scientific  prfaidple  is  that  it  is  always  c  i>h!iHoHal ;  its 
form  of  statement  is  :  //  i4  if  true,  then  B  is  tr^i.  A  prin- 
cipU  differs  in  this  respect  from  a  fact  which  asserts 
unconditkmaOy  that  B  is  Inte.  Science  is  primarily  con- 
cerned with  the  formohtion  of  prindpks.  The  aim  of  thit 
book  is  to  formulate  some  of  tiie  fondaaacntnl  prMiff^flrt 
relating  to  economics. 

The  netiwd  and  order  of  treatment  are  not  altogether 
traditional.  The  thne-honofed  older  d  fcof^ — i»odiic> 
tion,  egrhange,  ditttibtttion,  ffwwwption^hit  been  fanad 

vH 


viii 


PSEFACE 


impracticable.  Such  an  order  was  probably  originally  in- 
tended to  parallel  the  natural  course  of  events  from  the 
production  of  an  article  to  its  consumption ;  but  to-day 
these  four  topics  scarcely  retain  any  traces  of  sudi  a 
parallelism.  "Distribution,"  for  instance,  has,  in  theo- 
retical discussions,  long  ceased  to  be  a  description  of  the 
processes  by  which  food,  clotiiing,  and  other  goods  are 
distributed  after  being  produced  and  prior  to  being  con- 
sumed, and  has  become  simply  a  study  of  the  determi- 
nation of  rent,  interest,  and  otiier  market  magnitudes. 
It  is  not,  therefore,  surprising  that  many  other  textbooks 
on  economics  have  abo  broken  away  from  th&  unfortunate 
order  of  topics. 

Of  the  many  possible  methods  of  writing  economic  text- 
books, there  are  three  which  foUow  well-defined,  thou^ 
widely  diflferent,  orders  of  topics.   These  are  the  "his- 
torical," tiie  "  logical,"  and  tiie  "  pedagogical."   The  his- 
torical  method  follows  the  order  provided  by  economic 
history ;  tiie  logical  begins  witii  a  classification  of  economics 
m  relation  to  other  studies,  explains  its  methodology, 
and  then  proceeds  by  means  of  abstract  examples  from  the 
simplest  imaginary  case  of  "  Robinson.  Crusoe  economics  " 
to  the  more  complex  conditions  of  real  life  ;  the  pedagog- 
ical be^ns  wiUi  the  student's  existing  experience,  theories, 
and  prejudices  as  to  economic  topics,  and  proceeds  to  mold 
them  into  a  correct  and  self- consistent  whole.   The  order 
of  the  first  method,  therefore,  is  from  ancient  to  modem; 
tiiat  of  the  second, /fMi  »imfk  to  complex;  and  that  of 
tiie  tiiird,  from  familiar  to  unfamiUar.  The  tiiird  order  is 
the  one  here  adopted.   That  the  proper  method  of  study- 
ing geography  is  to  begin  with  the  locaUty  where  the  pupil 
Uves  is  now  weU  recognised.   Witinrnt  sudi  a  beginning 
the  effect  on  the  student's  mind  may  be  like  that  betrayed 
by  tiie  schoolgirl,  who,  after  a  year's  study  of  geography, 
was  surprised  to  learn  that  her  own  playground  was  a  part 
of  the  surface  of  tlie  esrtli.  In  Bke  mumer  we  cannot 


fBVACB 


ii 


txptet  to  teadi  economics  successfully  unless  we  begm 
with  the  material  already  existing  in  the  student's  mind. 
Those  textbooks  which  open  with  a  discussion  of  the  rela- 
tions of  economics  to  anthropology,  sociology,  jurispru- 
dence, natural  science,  and  biology,  overlook  the  fact  that 
the  b^iimer  in  economics  is  totally  unprepared  even  to 
understand  the  meaning  of  these  great  subjects,  much  less 
their  relations  to  one  another.  The  same  sort  of  error  is 
made  by  those  textbooks  which  begin  with  a  comparative 
study  of  the  logical  machinery  by  iHiidi  truth  is  ground 
out  in  economics  and  in  other  sciences.  The  student's 
logical  faculty  must  be  exercised  before  it  can  profitably 
be  analyzed. 

This  book,  therefore,  aims  to  take  dw  account  <rf  those 
ideas  with  which  the  student's  mind  is  aheady  furnished, 
and  to  build  on  and  transform  these  ideas  in  a  manner 
adapted  to  the  mind  containing  them.  This  is  especially 
needful  where  the  ideas  are  apt  to  be  faUadkna.  The  eco- 
nomic ideas  most  familiar  to  those  first  ^>prnarMng  the 
study  of  economics  concern  .uoney,  —  personal  pocket 
money  and  bank  accounts,  household  expenses  and  in- 
come, the  fortunes  of  tbe  ridi.  Moreover,  these  ideas  are 
largely  fallacious.  Therefore,  the  subject  of  money  is 
introduced  early  in  the  book  and  recurred  to  continually 
as  each  new  branch  of  the  study  is  unfolded.  For  the 
same  reason  omsidarable  attoitkm  is  {^ven  to  cadi  ac> 
counting,  and  to  those  fundamental  but  neglected  princi- 
ples of  economics  which  underlie  accotmting  in  general 
Every  student  at  first  is  a  natural  "mercantilist,"  and 
every  teacher  has  to  cope  eventuaDy  with  the  prejudices 
•ad  misconceptions  which  result  from  this  fact.  Yet  no 
textbook  has  apparently  attempted  to  meet  these  difficul- 
ties at  the  point  where  they  are  first  encountned,  which  is 
et  the  beghu^g. 

It  may  be  worth  while  to  distinguish  the  pedagogical 
procedure  here  proposed  from  that  leceatly  advoalsd 


«  PSKTACX 

under  the  somewhat  infelicitous  title  of  the  "Inductive 
Method."  I  refer  to  the  method  by  which  the  student  is 
at  first  to  be  taught  economic  facts  without  any  formular 
tion  of  principles.  This  proposal  seems  to  assume  that  the 
student's  mind  is  quite  a  blank  to  start  with,  and  that  it 
is  possible  on  this  tabula  rasa  to  inscribe  facts  without  at 
the  same  time  intimating  how  they  are  related.  The  truth 
is,  however,  that  the  student's  mind  h  already  famffiyy 
with  a  great  mass  of  economic  facts  acquired  at  home, 
on  the  street,  and  from  the  newspapers.  He  knows  some- 
thmg,  not  only  of  money  and  accounts,  but  of  banks,  rail- 
ways, retail  trade,  labor  unions,  trusts,  the  stock  market, 
speculation,  the  tariff,  poverty,  wealth,  and  innumerable 
other  topics.  It  is  equally  true  that  his  head  is  full  of 
theories  as  to  the  relations  of  these  facts,  —  the  working 
of  wpg&y  and  demand,  the  nature  of  money,  the  operation 
of  a  protective  tariff,  etc.  The  difficulty  is  that  most  of 
his  theories  and  many  of  his  supposed  facts  are  false  ;  and 
b^ore  we  add  to  his  ill-assorted  collection  of  mental  furni- 
ture we  must  arrange  in  orderly  f ashitm  that  iriucfa  he 
already  possesses.  Moreover,  it  is  ahsost  imponil^  to 
impart  successfully  any  considerable  mass  of  disconnected 
facts.  If  the  teacher  does  not  indicate  the  true  connec- 
tions, the  student  will  afanost  inevitably  supply  fabe  <»es ; 
or  else  the  facts  without  conncctioos  will  be  abo  without 
interest. 

These  objections  to  the  so-called  "inductive  method" 
are  not,  however,  intended  as  militating  agamst  the  object 
which  its  advocates  strive  to  attain,  viz.,  to  make  the  stu- 
dent think  for  himself,  nor  against  the  chief  means  by 
which  they  actually  attain  this  object,  viz.,  the  use  of 
original  problems.  Every  teacher  can  and  shouki  Olus- 
tiate,  emphasize,  and  elaborate  every  step  in  the  study  of 
principles  by  propounding  problems.  Sumner's  coUection 
of  problems,  or  the  more  recent  collections  of  Taylor  or  of  ' 
th«  University  of  Chicafo,  may  profitably  be  med  to  tup- 


ftBTACt 


Zl 


plement  those  which  every  good  teacher  will  readily  invent 
tlx  himsdf  from  the  suggesticms  of  the  text,  of  currmt 
newsptpen,  or  ol  students'  questimis.  These  should  vary 
from  year  to  year  according  to  current  events  and  tltt 
exigencies  of  the  case  as  understood  by  the  teacher.  ^ 

A  pamphlet  of  suggestions  as  to  problems  to  be  used  in  i 
connection  with  this  book  has  been  prepared  for  teachers  / 
and  may  be  obtained  of  the  publishers.  It  is  submitted 
that  the  present  treatment  of  the  subject  lends  itself  pecul- 
iariy  to  die  use  of  definite  soluble  problems  in  place  of  the 
vague  "  problems  "  which  are  usually  employed  in  eccnunnks 
and  which  call  for  little  more  than  an  expression  of  opinion. 
Incidentally,  the  teacher  will  find  that  these  definite 
arithmetical  problems  are  not  only  much  more  iiseful  to 
the  student,  but  are  mudi  kn  trraUe  for  tlie  kstriKtor 
to  correct  and  grade. 

Problems  shoidd,  I  believe,  supplement  and  not  supplant 
a  textixMk.  The  ^ort  to  substitute  problems  for  textbo(^ 
has  ahrays  failed  even  in  those  subjects  which,  like  algebra 
and  geometry,  may  be  said  to  consist  naturally  of  a  series 
of  problems.  A  preliminary  framework  of  general  prin- 
ciples is  needed  in  order  to  formulate  special  problems  of 
real  value.  Problems  which  are  really  soluble  by  the 
beginner  can  be  little  more  than  appHcationt  of  geaeril 
principles  to  special  cases. 

What  has  been  said  will  help  explain  why  greater  atten- 
tim  than  usual  is  here  paid  to  certain  theoMS,  muh  as 
money,  bank  deposits,  accounting,  the  rate  of  interest,  and 
the  personal  distribution  of  wealth ;  as  well  as  why  less 
attention  than  vanal  is  paid  to  certahi  other  themes,  such 
as  methodology  and  those  obs(^te  theories  like  the  "wi^ 
fund  "  theory  which  (unlike  some  other  obsolete  theories) 
has  probably  never  formed  any  part  of  the  student's 
mental  stock  in  trade. 

To  some  critics  the  abusdaiit  toe  catvn  my  Man 
too  advanced  fox  an  dmmtaiy  ivork.  But  ^ir  ate  k 


now  80  oommoD  b  tiie  advanced  treatises  to  which  the 
student  is,  if  possible,  to  be  led,  that  their  introductkm 
here  is  but  a  necessary  part  of  his  preparation.   The  very 
fact  that  there  is  at  present  no  elementary  book  m  which 
the  nature  and  use  of  the  graphic  method  has  been  made 
clear  for  the  elementary  student  is  a  strong  argument  for 
its  adoption.    Moreover,  I  am  persuaded  that  the  "  diffi- 
culties "  in  the  elementary  use  of  curves  are  largely  imagi- 
nary.^ Every  beginner  in  economics  may  be  assimied  to  be 
familiar  with  latitude  and  longitude  on  a  mi^,  and  periuqw 
also  with  the  temperature  charts  in  the  daily  paper.   It  is 
a  very  easy  step  from  these  to  curves  of  supply  and  de- 
mand, provided  they  be  used  with  sufficient  frequency  and 
with  sufficient  system  to  take  lodgment  m  the  student's 
memory.   The  student  who  sees  but  one  diagram  in  a  book 
will  find  the  initial  effort  of  understanding  that  diagram 
scared  WOTth  while, —not  much  more  worth  while  than 
to  be  taught  the  use  of  k)garithms  without  applying  them 
to  more  than  one  or  two  practical  exar^ples.   As  a  matter 
of  fact,  there  are  few  things  which  so  facilitate  the  under- 
standing of  economic  relations  at  every  stage  of  economic 
study  as  the  use  of  diagrams;  and  it  is  believed  that,  with 
them,  the  elementary  student  can  proceed  both  faster  and 
further  in  economic  analysis  than  without  them. 

Some  fHeada  are  hidined  to  criticize  the  book  as  being 
too  cold  an  analysis.  They  point  out  that  the  student's 
main  interest  in  the  subject  is  a  "human  interest"  and 
concerned  primarily  with  the  practical  and  immediate 
solution  of  great  public  problems.  No  one  acquainted 
with  my  interest  in  some  of  these  problems  can  accuse  me 
of  lack  of  appreciation  of  the  "human"  element  in  them  all. 
But  the  more  one  studies  these  problems  and  the  attempts 
at  their  sohition,  the  more  evident  it  becomes  that  most 
rtudents  approach  them  with  an  insufficient  grounding  in 
fundamental  principles.  In  social  as  in  medical  tiierapeu- 
tics  a  lack  of  knowledge  of  anatomy  and  physiology  resulU  in 


PSETACB 


quackery  —  in  remedies  worse  than  the  disease  whirh  it 
is  prop(»ed  to  treat.    I  believe  that  one  of  the  greatest  i 
needs  to-day  in  the  teaching  ci  dementary  econoanics  k  j 
to  curb  this  popular  tendency  to  run  after  remedies  before  ' 
formulating  principles.   In  the  present  book,  therefore, 
while  most  of  the  great  practical  problems  of  economics  are 
outlined  in  connectfon  with  the  prindpks  wfaidi  must  be 
employed  in  their  solution,  the  solutions  themselves  are 
not  discussed.   Full  discussion  of  all  these  problems  is 
impossible  in  any  textbook,  and  I  earnestly  deprecate  a  N 
gousiml  ex  catlmka  pronouncement  of  persooal  apUkm.  by  ' 
an  author  on  moot  questions,  especially  m  a  book  for  imma^ 
ture  students.  The  only  proper  course,  in  my  opinion, 
is  for  the  student  first  to  master  the  fundamental  economic 
piiiic^ples  on  wUdi  aU  or  most  competent  ecooamists  can 
agree,  and  then,  as  suggested  on  the  dosing  page  of  this 
book,  to  take  up  some  one  moot  question  —  some  burning 
issue  of  the  day  —  and,  so  far  as  possible,  master  that  also. 
In  the  meantime  he  should,  so  far  as  possible,  keep  an  open 
mind  on  other  problems  imtil,  in  course  of  time,  they  may 
also  be  taken  up  intensively,  one  by  one.    A  textbook 
which  attempts  to  supply  the  student  with  ready-made 
opinfons  on  all  practical  problems  "yrMit  he  waits,"  may 
be  suppfying  a  real  demand,  but  is  not  pofocn^  a  hf^ 
service. 

Po^bly  the  slight  emphasis  here  put  on  historical,  de-  \ 

scriptive,andiffacticaleooiiomicsmaydedde8oaMteadbers  ) 
against  the  use  of  this  book  and  lead  them  to  choose  a 
book  in  which  "  the  whole  subject  of  economics  "  is  treated.  ' 
I  submit,  however,  that  no  such  "complete"  book  exists, 
since  no  author  exists  capable  of  writing  it,  and  that  all 
which  aim  to  be  complete  lack  at  least  half  <rf  the  subject 
matter  here  presented  and  which  is  taken  for  granted  as  if 
fully  known  by  the  student.  In  many  books  the  terms 
"assets,"  "KahOltiei,"  "inoome,"  "cost,"  and  "rapidity 
ol  diculatiaii an  «sed  without  dlKOMlQai  or  eva  deMfo^ 


av 


PUTACX 


It  would  be  out  of  phoe  here  to  criticbe  other  textbooks,  but 
it  has  been  my  hope  that  the  present  book  may  be  found  « 

useful  introduction  to  other  books,  even  those  which 
attempt  to  cover  the  subject  "completely."  I  would 
abo  point  out  that,  by  omitting  the  more  "therapeutical" 
parts  of  the  subject,  I  have  escaped  most  of  its  controversies, 
for  the  controversies  to-day  are  more  as  to  the  solution  of 
practical  problems  than  as  to  the  validity  of  such  elementary 
principles  as  are  contained  in  this  book.  Freedom  is  thus 
allowed  to  each  teacher  who  uses  this  textbook  to  foOow 
it  up  by  whichever  among  others  contains  the  therapeutical 
treatment  which  he  personally  regards  as  correct.  I  have 
been  strtt<±  by  the  fact  that  my  critics  seldom  question  the 
correctness  of  the  propositions  here  laid  down.  If  this 
book  may  afford  a  common  starting  point  for  economic 
instruction  of  different  schools  of  thought  and  different 
attitudes  toward  public  problems,  it  will  have  served  one 
important  purpose. 

Especial  care  has  been  taken  in  formulating  definitions 
so  that  the  concepts  described  by  these  definitions  may 
become  firmly  fixed  in  the  students'  minds.  These  defini- 
tions and  concepts  have  been  chosen  in  reference  to  their 
usefulness  in  economic  analysis  as  well  as  their  conformity 
to  practical  '-^age.  I  am  one  of  those  who  believe  that 
when  the  usage  of  academic  economics  conflicts  with  the 
ordinary  usage  of  business,  the  latter  is  generally  the  better 
guide.  This  is  not  only  because  business  usage  has  a 
thousand  times  the  currency  of  academic  usage,  but  also 
because  in  general  it  comes  ckwer  to  the  needs  of  economic 
analysis.  Here  is  not  the  place  to  argue  why  this  is  true, 
or  even  to  prove  that  it  is  true.  I  will,  however,  mention 
one  consideration  which  appeals  increasmgly  to  practical 
teachers:  An  academic  tradition  which  is  unconvincing  to 
the  student  is  sure  later,  when  he  himself  becomes  a  business 
man  and  perceives  how  badly  academic  traditions  are  out 
of  tune  with  modem  business  usa^,  to  breed  a  deep  distrust, 


Xf 


if  not  coatcmpt,  for  all  academic  economics.  Thus,  expedi- 
ency, as  wdl  as  sound  theory,  should  urge  teachers  to 
xMpect  the  mage  of  barfDMi  men. 

I  have  taken  so  much  space  to  justify  those  features  of 
this  book  which  will  seem  new,  because  several  teachers  to 
whom  tiie  eaqperimental  editions  were  submitted  have 
condemned  it  at  sight  as  unteachable.  I  am  gl^d  to  re- 
port, however,  that  the  teachers  who  have  actually  tested 
the  book  in  classroom  have  usually  become  extremely 
enthusiastic  over  its  "teachableness,"  although  many  of 
them  had  begun  its  use  with  grave  misgivings.  \ 

The  eiq)erimental  editions,  of  whidi  there  were  tiro, 
nwe  made  possible  by  special  arrangement  with  the  pub- 
Ibhers.  Tl^  gave  oiqwrtunity  for  thorough  trial  for  two 
years  in  classrooms  at  Yale,  imder  neariy  a  dooen  cHffeiCDt 
instructors.  As  a  result  of  this  trial  and  the  many  valuable 
suggestions  and  criticisms  which  were  obtained  from 
teadiers,  students,  and  friends,  the  book  has  been  virtually 
written  three  times.  The  presoit  —  die  thiid  and  firud - 
edition  is  the  first  to  be  oflfered  to  the  general  public. 

I  am  under  obligations  to  President  Hadley  of  Yale  for 
tlw  fundamental  idea  employed  in  the  discussion  of  those 
supply  curves  which  illustrate  the  wiffingness  to  prodnoe 
"a  given  amount  or  more"  instead  of,  as  ordinarily  assimied, 
"a  given  amount  or  less";  also  for  helpful  critidsn  on  the 
inesentaticm  of  that  most  difficult  subject,  the  rate  of 
interest.  I  am  also  indebted  for  h^)ful  ditidsm  to  my 
colleagues.  Professor  Clive  Day,  Assistant  Professors  F.  R. 
Fairchild,  H.  P.  Fairchild,  W.  H.  Price,  and  A.  L.  Bishop, 
Dr.  H.  G.  Brown,  Dr.  E.  J.  Clapp,  now  in  New  York  Univer- 
sity, and  Dr.  J.  L.  Leonard ;  also  to  Ptofessor  Charles  W. 
Mixter  of  the  University  of  Vermont,  Professor  Harvey  A. 
WoMter  of  De  Pauw  University,  Professor  Louis  N.  Robin- 
■cm  of  Swarthmore  College,  Dean  David  Kinley  of  the 
University  of  Illinois,  Professor  E.  W.  Eemmeier  <tf  Oaa^ 
Vtdvtmty,  Vnkmot  H.  J.  Dm^on  of  the  Wmdif 


xvi 


of  »^uri  Professors  E.  R.  A.  Sdfanan.  H  R  S«u«r 

^S^.T!5^.^^^'y'  F.  Hickemell,  now^S 

the  Brookmire  Economic  Chart  Comoanv  of       t  * 

Brown  Broth^  and  Compary  of  New  York.  mTm^H 
Parmelee,  statbtidan  of  the  Bureau  of  : 
Waslungton,  D.C,  Professor  m^Z'^^* 
^usetto  Institute  of  Technology,  Dr.  Leoi^^'^i^ 
New  Haven,  and  to  Mr.  J.  M.  ShortUfie  of  the 
Dq>artiiieiit  d  Yale  University. 

I  endeavored  to  obtain  a  dear  idea  of  tl»m«i««^  J   *  » 
viewpoint  by  o£feri„g  prizesT?^  taJ^Sf^ 
.tt^^  U»  book  „  a  textboSTtte^S 
Jjr  .  co«mrftt«  oJ  instructor,  otto 

found  hdphU.   To  a  SaJlSr,  .^.itlTS.S 

J  aWcfam,  e^^daUy  m  to  the  mode  of  pr«. 
Mlation,  Me  due  to  my  brotlier,  HaiM  W.  Kbher.  wh^ 
todly  read  and  critid«d  an  ft,  JuSCid 
both  pKlimiuuy  edituu.  — "-"""Hkmo 

Mu^  IRVING  nSHER. 


SUMMARY 


IntroductiiM      .....  Ch^pten  I-II 

Capital   Chapter  III 

Inoome   Chapten  IV-V 

Gq^aadlaoooM  ....  Cbtptan  VI-VII 

DmBMIMATIOM  OP  PSKtt 

General  Prices   Chiytm  VIII-XIV 

Particular  Prices   Oupters  XV-XVIII 

Rate  of  Interest   Cbiylen  XIX-XXII 

PROICIFLBS  of  DiSTUBOnON 

SoiircM  of  Idcoom    ....  Cbaptm  XXHI-OCXIV 

.     .     .  OwyHw  XXV-XXVI 


CONTENTS  BY  CHAPTERS 


I.  Wbaltb     .   I 

II.  PKOPSftTV  •••••...*  ag 

III.  Capital   37 

IV.  INCOMS   60 

V>  CSotnoHM  Iwoom  Aoooumi  •     •     •     •    •  y] 

VI.    CAmAUaM  IMOOMB   MS 

VII.  Variations  op  Income  in  Rklation  to  Capital  .  137 

VIII.  Pkinciples  Govbrnino  the  PintCHASiMO  PowBR  or 

MONXY   144 

n.  lnfMi—CB  or  Vrnrom  Couudict  ....  16$ 

X.  Cahsm  AMD  Eft  jm  or  Fvmemutm  FMnm  mm- 

nro  Transition  Periods   184 

XI.  Remote  Inpluencbs  on  Prices      ....  19s 

XII.  lUnion  InruiBMCBs  (CmMmmO    .     •     •     .  304 

XIII.  OnBtATimi  ov  Moratnunr  Sinwu  •     .     •     •  321 

XIV.  Conclusions  on  Monet   340 

XV.   Stn>PLY  AND  Demand   358 

XVI.  The  Inpluencbs  behind  Demand   ....  378 

XVII.  THE  iMPLOBMCBi  BnmD  MmT     ....  3^3 

XVIII.  Mutoallt  Related  Ftacn   333 

XIX.  Interest  and  Money   354 

XX.  Impatience  por  Income  the  Basis  op  Interest  .  365 

XXI.  Imfldencbs  cm  ImATomcE  pmt  iMcxmE  .  .  375 

XXII.  Tm  DmaMmATKm  or  m  Rate  or  Imtbbbit  .  3S9 

XXIII.  Income  prom  Capital   410 

XXIV.  Income  from  Labor   433 

XXV.  Wealth  and  Poverty   464 

XXVI.  Wealth  ams  WtavAss   494 


CONTENTS  BY  SECTIONS 


CHAPTER  I 
WlALTB 

I.  Definltkm  of  Economict  and  of  Wealth       .      •     •      .  I 

a.  Dittiacdon  bttwMB  lloMy  and  WmMi      .     •     •     .  S 

3.  OaiiHwlluu  of  WaaMi   9 

4.  Measumneat  of  Wealth       .......  11 

$•  Price   13 

6.  Value   17 

7.  Uadtof  AcenncyiBXcaaMriellMMVMMMi     •     •     .  flo 

CHAPTEK  n 
PRomn 

I.  The  Beaefita  of  Wealth.     .......  sj 

s.  ThtCoataofWealtt   35 

3.  Property,  the  Right  to  Benefita           .....  a6 

4.  The  Rdation  between  Wealth  and  Property  ....  30 

S>  Table  of  Tfpkal  Property  Rights   33 

6.  Practical  PwMmm  of  Propiy   f« 

CHAPTER  ni 
Catital 

1.  (.Capital  and  Income   37 

2.  Capital-goods,  Capital-vilM^  QfitaMiolaace  ....  39 
3   Book  and  Ifaiket  Values   44 

4.  Case  of  decreasing  Capital-balance.      .....  45 

5.  Insolvency  .....48 

6.  Rod  and  Fictidoua  PetKKis   fo 

7.  Two  Metiiods  of  Omibiaing  Qqiital  Aooooati     ...  51 

8.  Ultimate  Result  of  Method  of  Coi^tal   54 

9.  ConiiiBtoaa  to  be  Avoided     ..•..*.  57 

lai 


CONTENTS  BY  SKCTIONS 


CHAPTER  IV 
Income 

1.  Conceptsof  Income  and  Outgo  "fo 

2.  Income  Accounti .      .  64 

3.  Devices  for  Making  Net  Income  Regular  ....  68 

4.  How  to  Credit  and  Debit  ^ 

5.  OaiMioataiidEnoninPnctiGe.     •  .     .     •     •  7a 

CHAPTER  V 
Combining  Income  Accounts 

I.  Methods  of  « Balances**  and  « Couples."*  « Interactions**  .  75 
3.  Production:  Interactiou  which  duuge  the  Form  of  Wealth  77 

3.  Transportation :  Iata»ctioi»  whidi  duuge  the  Position  of 

Wealth  80 

4.  Exdiange:  Interactions  which  change  the  Ownership  of 

Wealth  .81 

5.  Accounts  Illustrative  of  Interactions  in  Production  .  .  85 
&  Prdininary  Results  of  Combining  these  Income  Accounts  .  88 

7.  Analogies  with  Capital  Accounting  ^ 

8.  Double  Entry  in  Accounts  of  Fictitious  Posons  ...  92 

9.  Double  Entry  in  Accoaatsfrf  Red  PoBOBs  .  ...  95 
le.  Ultinate  QmMs  and  laoome  .   ^ 

CHAPTER  VI 

Capitalizing  Incomx 

1.  The  Link  between  Capital  and  Income       ....  im 

2.  Capital  as  Discounted  Incoate   107 

3.  The  Discount  Curve   log 

4.  Application  to  Valuing  Instruments  and  Property       .      .  iia 

5.  EftctofChaqgiogtheRateofloteratt      .     .     .     .  ia| 

CHAPTER  VII 
Vari/tions  of  Income  in  Relation  to  Capital 

I.  Interest  Accrued  and  Income  Taken  Out  .  .  .127 
a.  nfatstratitms   lag 


ocHffxsms  Bv  sicnoMi 

nenoM 

3.  Coniiisioiu  to  be  Avoided   13a 

4.  Standardizing  laoCMM  136 

5.  The  Risk  Element   138 

6.  Review   140 

CHAPTER  VIII 
PUMCiPUS  GovmnMO  rm  PuKOusnro  Pown  or  lloanr 

I.  Introductory   144 

a.  The  Nature  of  Money   I47 

3.  Hie  Equation  of  Exdiaage  Arithmetically  Ezprened   .      •  151 

4.  The  Equation  of  Exchange  Mechanically  Expressed      .      .  156 

5.  The  liquation  of  Exchange  Algebraically  Expressed     .      .  159 

6.  The  "Qautfty  Theory  <rf Money"   160 

CHAPTER  IX 

iMfLDSNCB  C9  DBFOOT  COKUKCt 

I.  The  Mystery  of  Circulating  Credit   165 

a.  The  Basis  of  Circulating  Credit   171 

3.  Banking  limitatioos   174 

4.  The  Total  Currency  and  its  Circulation   178 

5.  Deposit  Currency  Normsdly  Proportional  to  Money  •  .  180 
6>  Siiiiiinify   •••*  1S3 

CHAPTER  X 
CAtnss  AMD  Efrcts  or  PuRCHAsmo  Pown  doumo 

TKAMftnOM  PiMOM 

I.  Transitioa  Perk>d8       .      ,   1I4 

a.  How  a  Rise  of  Prices  Generates  a  Further  RiM    .      .      .  1I6 

3.  How  a  Rise  of  Prices  Culminates  in  a  Ciiaia  .     .     .     •  187 

4.  CcwnphHwi  of  tt>  Cwdtt  Cyde   1^ 

CHAPTER  XI 
■mom  IMnillBICIt  ON  mcH 

t*  InftieBces  which  Conditions  of  Production  and  Consumption 

Esert  (»  Trada^  and  therefore  on  Prices  .      .      .     •  19a 


xziv 


CONTENTS  BY  SECTIONS 


a.  InflaeBoet  wfaidi  Conditions  Connecting  Prodaem  woA  Con- 
.-.Z""*"        **"  therefore  on  Prices  i,* 

3.  I»™ce  of  Individual  Habite  on  Velocities  of  CirxMlation,  and 

therefore  on  Prices  ^  - 

4.  I«»fl«eace  of  Systems  of  Payments  on  VelodtiM  of  Circuhtion! 

and  therefore  on  Prices  

5.  Influence  of  General  CauMS  on  Vefedtiet  of  CiraditioB.  and 

therefore  on  Prices  

6.  InAieBca  on  the  Vohune  of  Deposit  CiLreaJy,  and  therefore 

oaFtictM  ^ 

CHAPTER  XII 
Remote  Influences  {CoMtinutd) 

I.  Influence  of  "The  Balance  of  Trade"  on  the  Quantity  of 

Money,  and  therefore  on  Prices  «u 

8.  Influence  of  Melting  and  Minting  on  the  Quantity' of  Money 

and  therefore  on  Prices    .  .  300 

3-  !»*«««»  of  the  Predoction  and  Cbnsumption  of  Money  Metata 

withe  Quantity  of  Money,  and  therefore  OB  Prices  .      .  an 

4.  MsdamleallUustiation  of  these  Influences    .      .     .     ,  ,,j 

CHAPTER  XIII 

OmAtwM  or  MoMRAftr  Smaa 

I.  Gresham*s  Law  . 

•••••  221 

a.  Bimetallism  .      .  .      ,      ,  , 

3.  When  Bimetallism  Fails       •      •      i      !      !      !      .*  ^6 

4-  When  Bimetallism  Succeeds  •      .      .      !      i      i      *  ai 

5.  Changes  in  Production  and  CoBsanq)tloa      .      *      *      *  att 
«.  The  "Limping  "Standard  

CHAPTER  XIV 
CoDcumiom  on  Momv 

I.  Can  "Other  Things  Remain  Equal?"   .....  140 

a.  An  Increase  of  Money  does  not  Decrease  its  Velocity   \      '  242 

3.  Ab  Index  Nnmber  of  Prices  ....  Jja 

4.  ThoWrtofy  of  Price  L«»«Is  ajj 


OOKIENTS  BY  SECTI0M8 


zzv 


CHAPTER  XV 


Supply  and  Demand 

MCTRm  »*" 

I.  Individual  Prices  Presuppow  a  Price  Level   .     .      *  .358 

3.  A  Maricet  and  Competition   36e 

3.  Demand  and  Supply  Schedules   361 

4.  Demand  and  Supply  Curves   363 

5.  Shifting  of  Demand  or  Snpfdy   368 

CHAPTER  XVI 

The  iMFtUEMCES  BEHIND  DEMAKD 

I.  Individual  Demand  Schedules  and  Curves     ....  378 

3.  Desirability   381 

3.  IBnstntion   383 

4.  Some  Remarks  on  Derirability   386 

5.  Individual  Demands  Derived  from  Marginal  Desirabilities     .  387 

6.  RehtioB  of  Market  Price  to  Desirability   394 

7.  Importance  of  the  Marginal  Desirability  of  Money  .      .      .  398 

8.  Desires  or  Wants,  the  Foundation  of  Demand      .      .      .  $ao 

CHAPTER  XVII 

Ttat  Ijwuiuicbs  bbhimu  Snrvr 

I.  Analogies  between  Supply  and  Demand       .      .      .  • 

3.  Prindple  of  Maij^nal  Cost   307 

3.  Upward  Siq^  Carves  iriiidi  Ttim  Back     .      .      .  'Sis 

4.  Downward  Supply  Curves   314 

5.  Resulting  Cutthroat  Competition  .      .      .      .      .  .317 

6.  Resalting  Tendenqr  toward  MoBopdy   331 

7.  Fixed  and  Running  Costs   333 

8.  General  and  Particular  Running  Costs   336 

9.  MoBopoty  Pikt   $»9 

CHAPTER  XVIII 

MOTDALLY  RSLATBD  PHICIt 

I.  Arbitrage   SS) 

3.  Speculation   33I 


xxvi 


OONIXNTS  BY  SECXXONS 


3.  Prices  of  Good!  which  Cbmpete  OB  the  Demwd  Side   .      .  *iZ 

4-  Pnces  of  Goods  which  are  Complementaiy  OB  tile  Demend  Side  447 

5.  Similar  Relations  on  the  Supply  Side    ...  ^8 

6.  Prices  of  Goods  in  Seriee      ••..!*  im 

7.  Efforts  Mid  SaritftcrioBi  the  UMwig,  F.^^^      •      •      •  ijl 

CHAPTER  XIX 
Interest  and  Momxt 

I.  The  Importance  of  Interest  

3.  A  Common  Mraey  Fallacy    •••!!!*  t  6 

3.  Effect  during  Appreciation  or  DqwehitfMl    .*      .*      '  ' 

4-  Effect  of  Unequal  Foresight  !      !  jfa 

CHAPTER  XX 

blPATISMCE  fOK  IHOOMB  TRB  BASB  OT  iMTTOSr 

1.  The  Ptodttcthrity  Theory      ....  ^. 

2.  The  Socialist  Theory  !      *      *  ^ 

3.  Impatience  the  Source  of  Interest  .!***'«!? 


371 


CHAPTER  XXI 

iHFLOBfCBS  OM  IMPATIBNCx'fOR  InCOMS 

1.  DIferences  in  Impatience  Due  to  Differences  in  Human  Nature  37c 

2.  Differences  m  Impatience  Due  to  Differences  in  Income.  478 

3.  Influence  of  the  Dist   mtion  in  Time  of  th- in«,««^»  '  fl. 

4*  iBineBce 

5.  Influence 

6.  Summary 


3.  innuence  01  tne  Dist   mtion  in  Time  of  the  Income^itream  . 

4.  iBioeBceoftheSlieofthelncomMtream    .  ,81 

5.  Influence  of  Uncertainties  of  laooiBO  ...,*' 


3» 


CHAPTER  XXn 
T»  DsnumunoM  or  tub  Ratb  of  Intbust 

I.  EqnaHsfaig  Maiginal  Rates  of  Impatience  by  Borrowing  aad 

Lending  

a.  Equalizing  Matginal  Rates  of  Imj^atience  by  Sp^ndin^  and 


3«9 
394 


ooM'ixM'u  BY  ncnom  xcvii 

3.  Futility  of  Prohibiting  Interest   396 

4.  Oeuing  the  Lowi  Maifcet   398 

5.  The  Conditions  Determining  the  Rate  of  Interest  .      .      .  400 

6.  Historical  Illustrations   404 

7.  Interest  and  Prices  406 

8.  OaMificatioo  of  Price  Inflnncw   408 

CHAPTER  XXIII 
Income  from  Capital 

1 .  Distritmtion  acoording  to  Agents  of  Production  and  acoofdlBg 

to  Owners   410 

2.  The  Rent  of  land   413 

3.  Rent  and  Interest   423 

4.  Four  Fonas<tfInoome:  Interest,  Rent,  Dividends,  aad  Prafits  433 

5.  Avoicbaoeof  RUk   4*7 

CHAPTER  XXIV 
Imoomb  noM  f  r*iw 

1.  Similarity  of  Rent  and  Wages   433 

2.  Peculiarities  of  Labor  Su^dy  .......  436 

3.  The  Demand  ktt  Labor   440 

4.  The  EfSciency  of  Labor   444 

5.  The  "Make-work  "Fallacy   451 

6.  Wages  and  Entetprisers'  Profits  4{4 

7.  PNftti  and  IMstribution  Gcaoally   4f8 

CHAPTER  XXV 
Wealth  and  Poverty 

1.  The  Problems  of  Wealth  and  Poverty   4C4 

2.  National  Wealth  CHT  Poverty   487 

3.  Per  CapiU  Wealth  or  Poverty   489 

4.  Populatiim  in  Rdation  to  Wealth   ^ 

5.  Distribution  of  Wealth   4|6 

6.  Equality  of  Distribution  an  Unstable  Condition     .      .      .  ^ 

7.  The  Limits  of  Enrichmeit  and  Impoverishment    .      .      .  4S3 


zzviii 


CONTENTS  BY  SECTIONS 


BCnOH 

8.  The  Cycle  of  Wealth   ^ 

9.  The  Actual  State  of  Distribution  .  .  .  .  !  *  480 
10.  The  Inheritance  of  Propeny  491 


CHAPTER  XXVI 
Wealth  and  Wblfaks 


1.  Tnie  and  Market  Worth     .      .      .  . 

2.  Evils  Connected  with  the  Quantity  of  Wealth 

3.  Forms  of  Wealth  Injurious  to  the  Owner 
4>  Fonns  of  Wealth  Injurious  to  Society  . 

5.  Forms  of  Wealth  used  for  Social  Rivabr 

6.  The  Cost  of  Vanity  .... 

7.  Reme.'.;es  for  the  Evils  of  Vanity  . 

8.  RtwapitBlation  


494 
495 

498 

499 
SCO 
506 
508 
S" 


ELEMENTARY  PRINCIPLES  OF  ECX)NOMICS 


CHAPTER  I 


WEALTH 

1 1.  DtflaMoa  ol  BMoeaiet  tad  cf  WMllh 

EoOMomcs  may  be  mott  simply  defined  at  ibe  Seitnce  of 
Wtdth.  It  is  also  known  under  several  other  titles,  ol 
which  the  most  common  is  "Political  Economy."  The 
purpose  of  economics  is  to  treat  the  nature  of  wealth;  the 
human  wants  served  by  wealth;  the  satisfactkm  <rf  those 
wants  and  the  efforts  required  to  satisfy  them ;  the  forms 
of  the  ownership  of  wealUi ;  the  modes  of  its  acctmiulation 
and  dissipation;  the  reasons  that  some  people  have  so 
mtKhof  id  othos  so  little;  and  the  principles  that  regu- 
kte  its  (  nge  and  the  prices  iA&±.  result  from  exchange. 
In  a  word,  everything  wUch  concerns  wealth  in  its  general 
sense  comes  within  the  so^  of  economics.  It  is  worth 
emphairiiing  at  tlw  outset,  that  the  chief  purpose  of  eco- 
nomics is  to  set  forth  the  relations  of  wealth  to  human  life 
and  welfare.  It  is  not,  however,  within  the  province  of 
economics  to  study  aU  aspects  of  human  life  and  welfare, 
but  only  such  as  are  connected  in  some  rather  direct  manner 
with  wealth. 

To  most  persons  the  chief  interest  in  the  subject  lies  in  its 
practical  applications  to  puUic  problems,  such  as  those 
connected  with  the  tariff,  taatlon,  currency,  trusts,  trade- 
uniras,  strikes,  or  sodal&m.  These  proUems  sugfeit  tluit 
something  is  wrong  in  the  present  economic  order  of  society 
and  that  there  is  a  way  to  remedy  it.  But  before  we  can 
treat  of  ccoDomic  dfneisei,  we  must  first  understand  the 


t  ILBONTASY  PBOfCXPUi  Ot  ■C0N0IOC8  (Cfetf.! 

economic  principles  which  these  public  queitiont  involve. 

That  is,  the  study  of  economic  principles  must  precede  the 
application  of  those  principles  to  problems  of  public  policy. 
In  the  end  the  student  wiH  reach  more  satisfactory  con- 
clusions, if  at  the  beginning  he  will  put  aside  all  thought 

of  such  applications,  and  cease  to  count  himself  a  free  trader 
or  a  protectionist,  an  individualist  or  a  socialist,  or,  indeed, 
any  oth«r  kind  of  partisan. 

We  must,  then,  in  the  first  pUu»,  distinguish  *f«wvffliif 
principles  from  their  applications  to  public  problems;  in 
the  second  place,  we  must  distinguish  those  principles  from 
their  applications  to  private  problems.   Economics  does 
not  concern  itself  with  teaching  men  how  to  become  rich; 
nor  does  a  practical  skill  in  the  art  of  becoming  rich  imply, 
necessarily,  a  sound  knowledge  of  economics.   Economics,  it 
h  true,  represents  the  theory  of  business ;  and  business,  the 
practice  of  economics.  But,  though  they  are  not  in  the  least 
conflicting  —  indeed,  to  some  extent  they  are  mutually 
helpful  —  economics  and  business  are  nevertheless  totally 
different.   The  primary  requisite  of  a  good  business  man 
is  to  master  tht  detailed  facts  which  concern  his  own  indi- 
vidual operations ;  the  primary  requisite  of  a  good  economist 
is  to  master  the  general  principles  based  on  business  facts. 
Swne  of  the  wildest  economic  theories  have  originated  among 
successful  financiers    Men  who  have  been  trained  in  Wall 
Street  are  often  the  most  sadly  lacking  in  elementary  in- 
struction in  economics.   This  is  so  because  the  very  matters 
with  which  people  have  longest  been  familiar  are  frequently 
the  ones  which  th^  have  been  least  diqxMed  to  analyse. 
In  business  theoiy,  no  less  than  in  the  theory  of  public 
problems,  men  take  too  much  for  granted. 

Our  first  rule,  then,  in  approaching  the  study  of  economics 
fa  to  take  pithing  for  granted.  It  is  quite  as  in^ortant  to 
be  careful  in  defining  familiar  terms,  such  as  "prices" 
"wages,"  as  in  explaining  imfamiliar  ones,  such  as 
**  index  numbers  "  and  '*  marginal  utility." 


Sk.i1 


I 


The  chid  pmpote  of  thb  book  b  to  define  datify  tht 

fundamental  concq>to  ci  economics  and  to  state  aad  ptow 
the  fundamental  principles  of  the  science.  These  concepts 
and  principles  will  then  serve  as  a  basis  for  further  study. 
In  oUier  books  the  student  will  find  these  cosicepts  and  i»in- 
dfk»  appXied  to  problems  of  puUic  poUcy,  or  of  business 
management,  or  of  the  economic  history  of  nations.  We 
are  not  concerned  in  this  book  either  with  practical  prob- 
kms  or  economic  history  except  as  they  are  used  oocft- 
sionally  to  iUustrate  the  principles  under  consideration. 

Wealth  having  been  designated  as  the  subject  matter  of 
economics,  the  question  at  once  arises:  What  is  wealth? 
By  wealth  in  its  broader  sense  is  meant  material  objects 
owned  by  human  beings.  This  meaning,  however,  is  broader 
than  the  ordinary  meaning  of  the  term;  for  it  includes 
human  beings  themselves.  Every  hunum  being  is  a  "  nut- 
teiial  object "  and  is  "  Ofwaed  **  either  fay  another  human 
being,  as  in  the  case  of  slavery,  or  1^  hfaaudf,  if  he  is  a 
freeman.  But  in  ordinary  usage  men  e  cept  themselves 
from  the  category  of  "  wealth  "  just  as,  with  equal  incon- 
aistency,  they  except  themselves  fnm  the  category  of  **ani- 
mals."  Properly  ^)eakmg  man  is  wealth,  just  as,  pn^ly 
speaking,  man  is  an  animal.  But  we  so  seldom  need  in 
practice  to  take  account  of  man  as  wealth  that  the  ordinary 
meaning  of  wealth  indudes  only  maitHal  ol^^cU  mmiti  ky 
kumm  bektgs  <md  txttmal  to  tk$  owmr}  In  thfa  book  we 

>  Every  writer  may  define  a  term  as  he  pleases,  exc^t  that  he  should 
Justify  his  definition  in  one  or  both  of  two  ways :  (i)  by  showing  that  it 
accords  with  common  practice;  and  (3)  by  showing  that  it  leads  to  useful 
results.  The  above  definition  of  wealth  meeU  both  of  these  requirements. 
It  agrees  substantially  with  the  usual  undentaadioi  of  boriaeM  b«»mm1  it 
it  oaaial    dH  devdiopment  trf  the  sdeaoe  of  '"'^rf^ 

SomaeaBamiitt  add  to  the  d^tk»  that  an  object,  to  be  wealth,  mxA 
be  wfnL  Bat  otffity  b  really  inq>lied  b  ownmhip.  Unless  a  tUng 
is  thought  to  be  useful,  no  oat  would  care  to  own  it.  Nothing  is  owned 
which  is  not  useful  in  the  sense  that  its  owner  hopes  to  receive  benefits  from 
it,  and  it  is  onl}  1  this  sense  that  utility  is  to  be  employed  as  a  tedakal 
tena  in  ecmomics.  Tlwref<»e,asutiii^.isalna4yM||iMfaio*nairi^i| 


4 


KIUOMTAIY  PUNCmiS  OF  ^COMOIIlCti     |Qur.  I 


shall  follow  ordinary  usage  by  employing  this  nanonw 
meaning  except  occasionally  when  it  will  be  found  conven- 
ient to  refer  to  the  bioader  meaning.  Any  particular 
■rtiefe  of  woathmay  becaOcd  aa'^instnimait'*  Thusa 
locomotive  is  an  article  of  wealth  or  an  instrunMnt  Other 
examples  are  an  automobile,  a  horse,  a  home,  a  lot,  a 
chair,  a  book,  a  hat,  a  loaf  of  bread,  a  coin. 

In  commoD  parluice  wealth"  is  often  opposed  to 
"  poverty,"  the  contrast  being  between  a  large  amount  of 
wealth  and  u  small  amount ;  precisely  as  in  common  par- 
lance" heat  "  is  opposed  to  "  cold,"  the  contrast  being 
between  a  large  degree  of  heat  and  a  small  degree.  But 
Just  as  in  physics  ice  it  regarded  as  having  some  degree  of 
heat,  so  in  economics  a  poor  man  it  retarded  as  having  firmt 
d^ree  of  wealth. 

Wealth,  then,  inchadet  all  those  parts  of  the  material 
universe  that  have  been  appropriated  to  the  uses  of  man- 
kind.  It  includes  the  food  we  eat,  the  clothing  we  wear,  the 
dwellings  we  inhabit,  the  merchandise  we  buy  and  sell,  the 
tools,  machinery,  lactoiies,  ships,  and  railways,  by  which 
other  wealth  is  manufactured  and  transported,  the  land  on 
which  we  live  and  work,  and  the  goW  by  which  we  buy  and 
sell  other  wealth.  It  does  not  include  the  sun,  moon,  or 
etait,  for  no  man  owns  them.  It  ia  confined  to  this  little 


'  ^  mentioned  separately  in  our  definition.  Other  writers,  while 
ianiding  in  their  definition  the  idea  of  utility,  omit  the  idea  of  ownership 
and  simply  define  wealth  as  "usi-'ul  material  objects."  But  Uiis  definitioa 
includes  too  many  "objects."  i^Ujin,  wind,  clouds,  the  Gulf  Straun,  the 
heavenly  bodies,  e^MciaUy  the  nn,  from  which  we  derive  l%ht,  heat,  and 
«W.  Me  aB  useful  aad  aMtwU,  but  an  not  apt»ropriated,  and  so  are  not 
«■MBQB^)r  understood.  Even  mort  objectionable  are  those  Jen- 
mioiM  of  wealth  wUd)  omit  the  qualification  that  it  must  be  material ;  they 
do  this  in  order  to  include  stocks,  bonds,  and  other  property  rights,  as  well 
as  human  and  other  services.  While  it  is  true  that  property  and  services 
are  inseparable  from  wealth,  and  wealth  from  them,  yet  they  are  not  them- 
selves w«dth.  To  include  weiUth,  ptopaty,  and  aavktt  all  undrr  "  wealth  " 
invdves  a  ^>ede8  of  tr^  eomAif  A  mBway,  a  nUlwi^  share,  and 'a 
■ulwur  trip  are  not  three  aep«»te  iteras  of  wwHh;  they  an  tWMCtMy 


S 


pUnet  of  oun,  and  only  to  certain  parts  of  that ;  namely, 
the  appropriated  lections  of  its  surface  and  the  appropriated 
obje^  vpoa  that  MiffMe. 

I  a.  Disttaetioa  btlwiMi  MoMf  aa4  WmHk 

One  of  the  first  warnings  needed  by  the  begfauNr  k  tp 
avoid  the  common  confusion  of  wealth  with  money.  Fetr 
parsons,  to  be  sure,  are  so  naive  as  to  imagine  that  a  million- 
aire b  one  who  has  a  million  dollars  of  actual  money  stored 
away ;  but,  because  money  is  that partfcular kind  of  wmIUi  in 
terms  of  which  the  value  of  all  other  kinds  of  wealth  is  meas- 
ured, ii  is  sometimes  forgotten  that  not  all  wealth  is  money. 

We  are  not  yet  ready  for  an  extended  study  of  money,  nor 
evea  for  a  definition  of  mooey,  bat  as  a  waraJng  we  ihil  hilt 
enumerate  a  few  of  the  most  common  fallacies  whidi  bwet 
the  subject.  The  nature  of  these  fallacies  the  student  will 
understand  at  a  Utter  stage.  They  are  introduced  here  not 
with  any  idea  that  the  stiKleBt  wffl  at  OBoe  see  where  the 
error  lies,  but  chiefly  for  the  purpose  of  ridding  hb  niBd  id 
the  ordinary  unwarranted  assumptions  ubout  monsy. 

First  among  these  fallacies,  is  the  assertinn  that  if  one 
man  "  niakes  money,"  some  one  eise  must  .ose  "  it,  since 
there  is  only  a  fixed  stock  of  money  in  the  world,  and  i«; 
seems  clear  that  "  whatever  money  the  money-maker  gets 
must  come  out  of  some  one  else's  pocket."  The  flaw  in 
this  reasoning  is  the  assunq>tkm  that  gnW  hi  tiade  are 
simply  gains  in  actual  money,  so  that  in  every  busiaeM 
transaction  only  one  party  can  be  the  gainer.  If  this  were 
true,  we  might  as  well  substitute  gambling  for  business  and 
lor  manufacturmg ;  for  in  gamUhig  the  number  of  iWiin 
won  is  equal  to  the  number  of  doUars  lost.  As  a  matter 
of  fact,  however,  it  is  not  in  order  to  obtain  mon^  that 
people  engage  in  trade,  but  in  order  to  obtain  what  money 
wffl  buy,  and  that  is  precisely  what  both  partiea  to  a  Mmd 
traasBctkm  evoituaqy  do  obtain. 


6  ELEMENTARY  FHZNCIPLXS  07  ECONOMICS  K^.l 

Again,  some  persons  have  tried  to  prove  that  the  people  of 
the  earth  can  never  pay  off  their  oebts  because  these  debts 
amount  to  more  than  the  existing  supply  of  money.  "  If 
we  owe  money,"  it  is  argued,  "  we  can't  pay  more  money 
than  there  is."  This  assertion  sounds  plausible,  but  a 
moment's  thought  will  show  that  the  same  money  can  be, 
and  in  fact  is,  paid  over  and  over  again  in  discharge  of 
several  different  debts ;  not  to  mention  that  some  debts  are 
paid  without  the  use  of  money  at  all. 

A  few  years  ago  at  a  meeting  of  the  American  Economic 
Assoaation  a  Western  banker  expressed  the  opmion  that 
the  total  amount  of  money  m  the  world  ought  to  be  equiva- 
lent to  the  total  wealth  of  the  world;  else,  he  suggested, 
people  would  never  be  able  to  pay  their  debts.  He  explamed 
that  m  the  United  States  there  were  twenty  doUars  of  wealth 
for  every  dollar  of  money;  and  he  inferred  that  therefore 
there  was  but  one  chance  in  twenty  of  a  debtor's  paying  his 
debts.  "  I  win  give  five  doUars,"  he  said,  « to  any  one  who 
can  disprove  that  statement."  When  no  one  accepted  the 
diaflenge,  a  wag  suggested  that  it  was  because  there  was 
but  one  chance  in  twenty  of  getting  the  promised  five 
dollars ! 

The  attempt  to  equalize  money  and  wealth  by  increasing 
money  twenty  fold  would,  as  we  shall  see  later,  prove  abso- 
lutely futfle.  The  moment  we  increased  the  amount  of 
money,  the  money  value  of  all  other  forms  of  wealth  would 
nse,  and  there  would,  therefore,  stiU  be  a  discrepancy  be- 
twecn  the  amount  of  money  and  the  amount  of  wealth. 

A  very  persistent  money  fallacy  b  the  notkm  that  some- 
tmaes  there  n  not  enough  money  to  do  the  world's  business, 
and  that  unless  at  such  times  the  quantity  of  money  is 
increased,  the  wheels  of  business  wiU  either  stop  or  slacken 
their  pace.  The  fact  is,  however,  that  any  quantity  of 
money,  whether  large  or  small,  wiU  do  the  world's  business 
as  soon  as  the  level  of  prices  is  properly  adjusted  to  that 
quantity.  In  a  recent  article  on  this  subject,  an  editor  of  a 


Sic  a] 


W1A£XB 


7 


popular  magazine  put  thb  fallacy  into  the  very  title:  "There 
is  not  enough  mon^  in  the  world  to  do  the  worlcVs  work." 
He  sajrs,  "  The  money  is  not  com?  g  out  of  the  ground  fast 
enough  to  meet  the  new  coi  ditions  of  ul<'  "  In  reality, 
money  ia  coming  out  <rf  the  i:.-onnd  faster  'Jian  the  "  new 
coaditioos  "  requue,  with  the  <  c  rtsequent  .esult  <^  raising 
prices. 

A  more  subtle  form  of  money  fallacy  is  one  which  admits 
that  money  is  not  identical  with  wealth,  but  contemis  that 
money  is  an  indispensable  means  of  getting  wealth.  At  a 
recent  meeting  of  the  American  Economic  Association  a  very 
intelligent  gentleman  asserted  that  the  railways  of  this 
country  could  never  have  been  buflt  hi  the  eariy  fifties  had 
it  not  been  for  the  lucky  discovery  of  gold  in  California  in 
1849,  which  provided  the  "  means  by  which  we  could  pay 
for  the  construction  of  the  railways."  He  overlooked  the 
fact  that  the  world  does  not  get  its  wealth  by  buying  it. 
One  person-  may  buy  from  another ;  but  the  world  as  a 
whole  does  not  buy  wealth,  for  the  simple  reason  that  there 
would  be  no  one  to  buy  it  from.  The  world  gets  its  railways, 
not  by  buying  them,  but  by  building  than.  What  provides 
our  railways  is  not  the  gold  mines,  but  the  iron  mines.  Even 
though  there  were  not  a  single  cent  of  money  in  the  world, 
it  would  still  be  possible  to  have  railways.  The  gold  of 
California  enriched  thoat  mho  discovered  it,  because  it  oi- 
abled  them  to  buy  wealth  oi  others ;  but  it  did  not  provide 
the  world  with  railways  any  more  than  Robinson  Crusoe's 
discovery  of  money  in  the  ^p  provided  him  with  food.  If 
mmwy  could  make  the  w«»id  ridi,  we  should  not  need  to 
wait  for  gold  discoveries.  We  could  make  paper  money. 
This,  in  fact,  has  often  been  tried.  The  French  people  once 
thought  they  were  going  to  get  rich  by  having  the  govern- 
ment print  unlimited  quantities  of  paper  money.  Austria, 
Italy,  Argentina,  Japan,  as  well  as  many  other  countrio, 
including  the  American  colonies,  and  the  United  States, 
have  tried  the  same  e]q)eriment  with  the  same  results  —  no 


8 


ELEMENTARY  PRINCIPLES  OP  ECONOMICS      (Chap.  I 


real  increase  in  wealth,  but  simply  an  increase  in  the  amount 
of  money  to  be  exchanged  for  wealth. 

The  idea  that  money  is  the  essence  of  wealth  was  one  of 
the  ideas  which  gave  rise  to  a  set  of  doctrines  and  practices, 
called  Colbertism  or  Mercantilism,  the  earliest  so-caUed 
"  school "  of  poUtical  economy.  Colbert  was  a  distinguished 
minister  under  Louis  XIV  of  France  in  the  seventeenth 
century,  and  a  firm  believer  in  the  theory  that,  in  order  to 
be  wealthy,  a  nation  must  have  an  abundance  of  money. 
His  theory  became  known  as  MercantiHsm  because  it  re- 
garded trade  between  nations  in  the  same  Kght  in  which 
merchants  look  upon  their  business  —  each  measuring  his 
prosperity  by  the  difference  between  the  amount  of  money 
he  expends  and  the  amount  he  takes  in.  To  keep  money 
withm  the  country,  Colbert  and  the  Mercantilists  advo- 
cated the  policy  now  known  as  "  protection." 

To-day  it  is  generally  understood  that,  in  trade  between 
nations,  as  in  that  between  individuals,  both  parties  may 
gam  in  an  exchange  transaction ;  but  the  mercantiUstic  fal- 
lacy that  a  nation  may  get  rich  by  selling  more  than  it  pur- 
chases, and  coUecting  the  "  favorable  balance  of  trade  "  in 
money,  stiU  forms  one  of  the  popular,  bases  of  protectionism 
in  the  United  States.   The  more  intelligent  protectionists 
give  quite  different  reasons  for  a  protective  tariff,  but  the 
old  faUacious  reason  stiU  appeals  to  the  multitude.  Tliey 
continue  to  think  Uiat  by  putting  up  a  high  tariff  so  that 
people  are  prevented  from  spending  money  abroad  and  are 
compelled  to  keep  it  at  home,  the  country  will  in  some  way 
be  made  richer.   One  reason  for  the  persistence  of  this 
fallacy  is  tiie  continued  use  of  the  misleading  phrase  "  favor- 
able balance  of  trade  "  to  indicate  an  excess  of  expotta  over 
imports  and  "  unfavorable  balance  of  trade  "  to  indicate 
the  opposite  condition. 

Money  fallacies  of  the  kinds  we  have  described  must  be 
carefufly  avoided  by  tiie  student.  He  should  realize  that 
no  tedmical  tem,  such  as  "  money,"  can  be  used  as  a  basis 


SK.il 


WXAL1H 


of  reasoning  without  a  carefully  formulated  definition.  AU 
catch  phrases  should  be  avdded.  EqwdaUy  shookl  tbe 
student  be  on  his  guard  against  every  proposition  concerning 
money.  "  Making  money,"  for  instance,  is  a  catch  phrase 
used  without  any  definition,  troperly  speaking,  nobody 
can  "  make  "  money  except  the  man  in  the  mint.  The  rest 
of  us  may  gain  wealth,  but,  unless  we  are  counteifeitan,  we 
cannot  literally  "  make  "  money. 

We  live  in  a  complicated  dvUisation  in  which  we  talk  in 
terms  of  money.  Money  has  come  to  be  a  sort  of  veil  which 
hides  the  other  and  more  important  wealth  of  the  world. 
Our  first  task  is  to  take  off  the  veil  and  see  the  wealth  under- 
neath. We  shall  then  see  clearly  that  wealth  can  be  acoi- 
mulated  only  as  it  is  actually  produced  and  saved. 

fa.  Clusificatioa oi WMdth 

Various  kinds  of  wealth  may  be  distinguished.  That 
kind  of  wealth  which  consists  of  portions  of  the  earth's  sur- 
face is  called  land.  Among  examples  of  land  are  to  be  in- 
cluded not  only  farms,  dty  lots  and  streets,  but  mines,  ^ 
quarries,  oystor  beds,  fisheries,  waterways,  etc.  AU  waters 
which  are  owned  are  in  economics  called  land,  being  a  part 
of  the  surface  of  the  earth.  Fixed  structures  upon  land  are 
called  land  improvements.  The  chief  examples  of  land  im- 
provements are  iKRises  and  other  buikBi^  fences,  drains, 
railways,  tramways,  macadamized  streets,  etc.  Land  and 
land  improvements  taken  together  are  called  real  estate,  the 
word  "  real "  signifying  immovable.  All  wealth  which  is 
movaUe  may  omv^endy  be  called  commtHHes,  altboi^ 
the  usage  for  this  term  is  not  altogether  certain.  Among 
examples  of  commodities  are  wheat,  pig  iron,  food,  fuel,  fur- 
niture, jewelry,  clothing,  books,  chairs,  machinery,  etc 
ine  term  comnioaiiies  ajso  mciuaes  saviSy  so  nv  as  ubb 
particular  species  of  wealth  exists. 

It  will  be  ranembered,  however,  that  the  definitbn  erf 


lO  ELEMENTARY  PSINCIPLE8  OW  BCONOHICS  IGktf.I 

wealth  which  h  as  been  adopted  exdudes  free  human  beings. 

It  was  in  ore  to  exclude  free  human  beings  from  the  cate- 
gory of  wealth  that  the  phrase  "  external  to  the  owner  "  was 
inserted  in  the  definition.  Slaves  are  wealth,  for  they  are 
external  to  their  owner;  but  freemer  are  not  wealth  hi  its 
narrower  or  ordinary  meaning.* 

There  are,  of  course,  many  admissible  ways  of  classifying 
wealth.  That  which  follows  is  intended  to  exhibit  the  prin- 
cipal groups  into  which  wealth  most  naturally  falls.  It  is 
advisable  that  the  student  construct  other  cUssifications  for 
himself. 

Agricultural  land 
Building  land 
Ways  of  transit 

Buildings 
Improvements 
onhi^wmys 
WaaSSitteam 

Mineral 
A«ricultuial 
Manufiurtured 


WXAX3R 


Real  Estate 


Commodities 


Und 


Land  improve* 
ments 


Raw  materials 


Fioishfld  oroducts  /Consumable 


iDunble 


»Ih  die  brrader  meaning  of  the  term  "wealth"  aU  men,  even  bmum 
are,  as  has  been  said,  wealth.  But  they  are  wealth  of  a  peculiar  khid  b»-' 
cause  they  are  not,  like  ordinary  wealth,  bought  and  sold  and  because  the 
wealth  owned  and  its  owner  are  in  thfa  caw.  IdenticaL  It  is  dKBcult  how- 
ever to  draw  a  strict  line  of  distinctkm  between  slaves  (human  beinn 
owned  by  other  human  beings)  and  freemen  (human  beings  owned  by  tW 

-rl  """^  *«  o'ned  partly  by  others  and 

partly^  themselves;  as  for  instance,  vassals,  serfs,  indentured  servants, 
Mig-Ume  wrentices,  and  men  held  in  peonage.  A  man  bound  out  to  ser- 
vice  for  thirty  years  is  ahnost  indistinguishable  from  a  slave,  and  if  his 
^  ,K  T'^I     '""^^  <l"tinction  fades  away  ompietely.  Ob 

the  other  hand,  the  shorter  the  term  of  service  the  aeanr  does  &  oonditioB 
approach  freedom  As  a  matter  of  fart,  afanoat  aO  workers  in  modem 
!^  fii^^^*^  *^         and  for  some  period  of  time, 

evm  thou^  be  no  more  than  an  hour;  and  to  that  extent  they  are  not 
we.  In  short,  there  are  many  degrees  of  freedom  and  many  dcorees  of 
■^my,  with  no  fixed  Ime  of  demarcaUon.  This  is  one  reasMiwiw  Ae 
bmeder  meanhig  of  "wealth"  is  often  more  useful  than  the  nanoww 


Sk.41 


WMALTK 


XX 


It  scarcely  needs  to  be  stated  that  these  groups  are  not 
always  abadutely  distinGt  Like  aU  dasaes  of  concrete 

things,  they  merge  faiq)erceptibly  into  one  another.  For 
this  reason  the  classification  is  of  importance  only  as  it 
gives  a  bird's-eye  view  of  the  subject  matter  of  economics. 

1 4.  If euofMiMiit  cf  WmMi 

Having  seen  what  wealth  is  and  what  it  b  not,  and  having 
daasified  it  roug^y,  we  shall  next  examine  separately  its 
two  essential  attributes,  materiality  and  onvnerskip,  devoting 
the  remainder  of  this  chapter  to  the  first  of  these. 

The  materiality  of  wealth  provides  a  basis  for  a  physical 
measuranoit  of  the  various  articles  of  wealth.  Wealth  is 
of  many  kinds,  and  each  kind  has  its  own  appropriate 
vmit  of  measurement.  Some  kinds  of  wealth  are  measvired 
by  weight.  This  is  true,  for  instance,  of  coal,  iron,  beef, 
and  in  foct  of  most  coirinodities."  Of  units  of  wdght, 
a  great  diversity  has  been  handed  down  to  us,  such  as  the 
poimd  avoirdupois,  the  kilogram,  etc.  In  England,  besides 
the  avoirdupois  pound,  and  the  Troy  pound,  there  is  the 
pound  sterling,  used  for  measurii^  gold  coin.  This  is  mudi 
smaller  than  any  other  pound,  owing  partly  to  the  frequent 
debasements  of  coinage  that  have  occurred,  and  partly  to 
changes  in  the  past  from  silver  to  gold  money.  In  the 
United  SUtes  a  dollar  of  "  standard  gold  "  (gold  which  is 
^  fine)  is  a  xmit  of  weight  employed  for  measiuing  gold 
coin.  It  is  equivalent  to  25.8  grains,  or  to  of  a  pound 
avoirdupois,  since  there  are  7000  grains  in  a  pound  avc^rdu- 
pt^  We  can  scarcely  put  too  mudi  oiq^is  on  the  fact 
that  the  pound  sterling  and  the  dollar  are  units  of  weight. 
They  should  be  understood  as  such  before  any  attempt  is 
made  to  imderstand  them  as  units  of  "  value." 

For  many  art^s  it  is  not  so  convenient  to  measure  by 
units  of  weight  as  by  units  of  space,  whether  of  volume,  of 
area,  or  of  length.  Thus  we  have,  for  volume,  milk  meas- 


12 


ELEXENTAKY  PBIMCIFLB8  OF  ECQNOXICS  [CBAr.I 


ured  by  the  quart,  wheat  by  the  bushd,  wood  by  the  cord, 
and  gas  by  the  cubic  foot.  For  areas,  we  have  lumber 
measured  by  the  square  foot,  and  land  by  the  acre.  For 
length,  we  have  rope,  wire,  ribbons,  and  cloth  measured  in 
feet  and  yards. 

Many  articles  are  abeady  in  the  form  of  more  or  less 
convenient  units.   In  these  cases  the  measure  of  their 
quantity  is  the  number  of  such  units.   For  instance,  eggs 
or  oranges  are  usually  measured  by  their  number,  expressed 
m  dozens.   Similarly,  sheets  of  writing  paper  are  reckoned 
by  the  "  quire,"  pencils  and  screws  by  the  "  gross."  In 
such  cases  the  article  is  said  to  be  measured  "  by  number." 
But  "  number  "  is  by  no  means  peculiar  to  such  cases.  All 
measurement  whatever  implies  an  abstract  number,  as  well 
as  a  concrete  unit.  The  only  peculiarity  of  so-called  measure- 
ment "  by  number  "  is  that  the  unit,  instead  of  being  one 
whidi  is  applied  frwn  the  outside,  as  by  the  yardstick,  is 
one  mto  which  the  thingi  measured  ha|^  to  be  already 
conveniently  divided. 

In  measuring  the  quantity  of  any  particular  kmd  of 
wealth  It  IS  assumed  that  the  wealth  measured  is  homogene- 
ous, or  so  nearly  so  as  to  admit  of  measurement  by  a  given 
unit.  If  diflferent  qualities  or  grades  have  to  be  distin- 
guished, the  amount  of  each  quality  or  grade  requires  sepa- 
rate measurement  A  continuous  gradation  in  quality 
such  as  is  usuaUy  found  in  real  estate,  makes  it  necessary  to 
distinguish  a  great  number  of  different  qualities.  A  tract  <rf 
land  of  loo  acres  may  consist  of  a  dozen  different  quaUties  of 
land,  variously  adapted  to  pasture,  crops,  or  other  uses. 
To  describe  aU  this  land  as  simply  so  many  "  acres  "  is 
misleading.  It  is  necessary  to  specify  separately  the  num- 
ber  of  acres  of  "  pasture-land,"  "  wheat-land,"  etc. 

The  unit  of  measure  of  any  kind  of  .wealth,  therefore, 
when  fully  expressed,  implies  a  description,  not  only  (i)  of 
size,  but  also  (2)  of  quaUty;  as,  for  instance,  a  "pound  of 
granulated  sugar,"  It  is  necessary  to  enumerate  the  attri- 


butes  of  the  partkular  wealth  tmdor  condderati(m,  or 
enough  of  these  attributes  to  distinguish  that  species  of 
wealth  from  others  with  which  it  might  be  confused. 
Thus  it  is  often  necessary  to  specify  what  "  grade  "  or 
"  brand  "  is  meant,  as  "  grade  A,*'  "  Eagle  brand,"  etc 
Sometimes  the  spedal  variety  Is  doMted  by  a  "  tradooarii " 
or  "  hall-mark." 

Some  writers  have  erroneously  supposed  that  the  attri- 
butes <A  wealth  constitute  separate  and  independent  "  im- 
material "  sorts  of  wealth.  But  "  fertility,"  for  instance, 
is  not  wealth,  though  "  fertile  land  "  is  wealth.  '*  Sweet- 
ness "  is  not  wealth,  though  "  sweet  sugar  "  is  wealth ; 
"  beauty  "  is  not  wealth,  although  a  "  beautiful  gem  "  or 
other  object  of  art  is  wealth ;  "  strength  "  and  "  power  ** 
are  not  wealth,  although  "powerful  horses,"  autMmrfalci^  or 
waterfalls  are  wealth.^ 

{  5*  ^ric0 

We  have  considered  articles  of  wealth  as  measured  sepa- 
rately. Each  kind  has  its  own  q)ecial  unit,  as  the  poimd, 
gallon,  or  yard.  But  it  is  convenient  also  to  measure 
the  combined  value  of  aggregations  of  wealth.  The  term 
"  value "  introduces  the  subject  of  exchange.  So  much 
mystery  has  surrounded  the  term  "  value  "  that  we  cannot 
be  too  careful  to  obtain  a  correct  and  clear  idea  <rf  it  at  the 
outset.  In  the  explanation  which  follows,  the  concept  of 
value  is  made  to  depend  on  that  of  price ;  that  of  price,  in 
turn,  on  that  of  exchange ;  and  finally,  that  of  exchange  on 
that  at  transfer,  ht  tiib  sectkm  we  shaQ  treat  <tf  price; 

*  Some  people  speak  of  ihMMM  qualities  —  strength,  beauty,  skill,  honesty, 
intelligence,  etc.  —  as  though  they  were  wealth.  But  these  bear  the  same 
relation  to  human  beings  as  similar  qualities  of  articles  of  wealth  bear  to 
those  articles;  and  the  only  way  we  can  logically  make  them  even  altri- 
bukt  of  wealth  ii,  at  abewfy  stated,  to  call  human  beings  wealth.  T*"M 
Uwir  atttfiMtnb«oaBMittz9Mtaal  wntthia  thefanwkr  nean^of  that 


14  UmiMTARy  PWNOPLES  09  ICONOIIICS  IClAr.l 

J^to  obMm  the  Oder  Of  .equaice,  w 

Wealth  b  said  to  be  transferred  when  it  changes  owners. 
Aininsferts  aclumieofaimmhip.  Such  a  change  does  not 
necessanJy  unply  a  change  of  pkce.   Ordinarilyrof  cotme 

accompanied  by  a  change  in  itil 

Sf  SiiSS  ^J!^  '"t "  ^8  accompanied  by 
the  iriiysical  dehvery  of  these  articles  across  the  counts 
from  dealer  to  customer ;  but  in  many  cases  such  a  change  of 
posiUon  does  not  occur,  and  in  the  case  of  real  estateit  is 
even  unpossible. 

Transfers  may  be  voluntary  or  hivoluntary.  Examples  of 

fraudof  mdividuals,  as  in  the  case  of  robbery,  burglary,  or 
embealement;  (2)  through  force  of  goveinm;nt,  L  Sthl 
case  of  tans,  court  fines,  and  "emfaient  domain."  But 
at  present  we  have  to  do  only  with  voluntary  transfers. 
These  are  of  two  kinds:  (i)  one-sided  transfere,  i.e.,  ^ 
and  bequests;  and  (2)  reciprocal  transfers,  or  exchanges, 
which  are  of  most  importance  for  economics.  An  exchange 
of  wealth,  then,  is  a  pair  of  mutual  and  voluntofy  transfers  of 

When  a  certain  quantity  of  wealth  of  one  kind  is  ex- 
changed  for  a  certain  quantity  of  wealth  of  another  kind 

obtain  what  is  called  the  price  of  the  latter.  That  is  the 
f '^Jtf  imy  kind  U  the  amount  oj  any  other 
kind  of  wealth  supposed  to  be  exchanged  for  one  mU  of  ike 
g^kind  of  wealth.  Thus  if  100  bushels  of  wheat  are  «- 
changed  for  75  doUars  of  gold,  the  price  of  the  wheat  in 
terms  of  gold  fa  75  +  ,00,  or  three-fourths  of  a  doUar  of 
gold  per  bushel  of  wheat.  Contrariwise  the  price  of 
m  tenns  of  wheat  is  100  -  75,  or  one  and  one-third  bushds 
of  whMt  per  dollar  of  gold.  Thus  there  are  always  two 
laicet  in  any  eohange.  Practically,  however,  we  usually 


speak  only  of  one,  viz.,  the  price  fai  tains  of  money,  obtained 
by  (*{vkUng  the  number  of  unHt  of  money  by  the  niunber  of 

vadiA  of  the  article  exchanged  for  that  money.  It  follows 
that,  practically,  the  price  in  money  of  any  particular  sort  of 
wealth  is  the  amount  of  money  for  which  a  unit  of  that  wealth 
iiexckangtd.  The  fact  that  wealth  is  exchangeable  and  in 
the  dviliaed  world  is  constantly  changing  ownership  is  of 
great  importance  for  our  study.  Articles  of  wealth  which 
are  a^iom  exchanged,  such  as  public  parks,  are  not  com- 
monly thought  of  as  wealth  at  all,  although  logically  they 
must  be  included  in  that  category. 

While  it  is  true  that  any  two  kinds  of  wealth  may  be 
exchanged,  some  kinds  of  wealth  are  more  acceptable  in  ex- 
diange  than  others.  Mmi^  primarily  means  wealth  wfaidi 
is  gmerally  acceptaile  in  exchange.  Here  for  the  first  time 
we  reach  a  preliminary  definition  of  money.  This  definiticm 
b  based  on  the  most  important  characteristic  of  money  — 
its  exchangeability.  An  exchange  in  whkh  money  does  not 
figure  is  called  barter.  An  exchange  in  which  money  does 
figure  is  called  a  purchase  and  sde  —  a  purchase  for  the 
man  who  parts  with  the  money  (or  its  r^resentative,  a 
check),  a  nle  for  the  man  mho  receives  it  Originally,  afi 
exchange  was  barter,  but  to-day  most  exchange  as  we 
all  know,  purchase  and  sale. 

In  order  that  there  may  be  a  price,  it  is  not  necessary  that 
tiie  exdiange  in  questicm  shall  actually  take  place.  It 
may  be  only  a  contemplated  exchange.  A  real  estate  agent 
often  has  an  "  asking  price  " ;  that  is,  a  price  at  which  he 
tries  to  sell.  This  is  usually  above  the  price  of  any  actual 
sate  wUdi  may  occur  later.  In  the  same  way  there  is  (rftea 
a  "  bidding  price,"  which  is  usually  below  the  price  of  actual 
sale.  Hence,  the  price  of  actual  sale  usually  lies  between 
the  price  first  bid  and  the  price  first  asked.  But  it  sometimes 
happens  that  the  bidder  refuses  to  raise  his  bkiding  price, 
and  the  seller  refuses  to  lower  hu^  adsfaig  price  enough  to 
bring  the  two  IsgBthor.  In  radi  a  am  no  wle  takes  plnoe^ 


i6 


■uvniTAsy  FUMcafUBs  or  looNoiacs   [Cm».  i 

•ad  the  only  prices  arc  those  bid  and  ask^^  For  many 
commodities  the  trade  journaU  report,  preferably,  pikes  ot 
actual  sales;  but,  where  there  have  been  no  sales,  they 
sunply  report  the  prices  bid  or  asked,  or  both. 

When  there  is  no  sale,  especially  when  there  is  no  price  bid 
or  asked,  it  is  not  so  easy  to  answer  the  question :  What  k 
the  price?  Recourse  is  then  had  to  an  «  appraisal,"  which 
IS  amply  a  more  or  less  skillful  guess  as  to  what  price  the 
artlde  would  or  should  bring.  Appraising  or  guessing  at 
prices  IS  often  very  difficult  It  frequentiy  has  tobeem- 
ployed,  however,  by  the  government,  for  the  purpose  of 
ass^g  taxes  and  customs  duties  and  condemning  land- 
by  insurance  companies  for  settling  claims  and  adjusting 
losses;  by  merchants  for  making  up  inventories  and  sfaniUr 
statements;  and  by  statisticians  for  numerous  purposes 
In  fact,  some  people  make  a  living  by  appraising  wealth 
on  wlAA,  for  one  purpose     another,  a  price  of  some  sort 
must  be  set.   The  purpose  .  /idently  makes  a  great  differ- 
ence m  the  appraisal.   Sometimes  we  want  to  know  the 
pnce  for  which  an  article  could  be  sold  in  an  immediate 
forced  sale;  sometimes,  the  price  it  might  be  expected  to 
bring  if  a  reasonable  time  wer?  allowed;  sometimes,  tiie 
pnce  the  owner  would  probab'   cake;  sometimes,  tiie  price 
a  purchaser  would  probably  give.   These  prices  may  aU  be 
<Merent  A  family  portrait  may  be  worth  a  big  price  to 
tte  owner,  and  yet  bring  next  to  nothfatg  if  sdd  to  strangers. 
The  owner  would  naturaUy  appraise  it  at  a  high  figure  if  he 
wished  to  insure  it  against  fire,  but  if  he  should  try  to  bor- 
row money  on  it  from  a  pawnbroker,  the  appraisal  would 
undoubtedly  be  low. 

Consequently,  in  applying  an  appraisal,  we  encounter 
many  difficulties  because  tiie  parties  involved  usuaUy  have 
some  mterest  to  serve.  When  a  farmer  has  land  for  sale 
he  will  hold  it  at  a  high  price  to  prospective  purchasers! 
but  ^ill  enter  it,  if  tiie  trutii  must  be  told,  at  a  low  price  on 
thetaxlist  When  a  fire  loss  is  adjusted,  the  two  conffict- 


ing  intetwti,  vis.,  the  "  Innired  "  and  the  "  ooovtay/'  are 
usually  represented  by  two  eqMrts,  who  in  caie  of  iliMirii 
meat  call  in  a  third. 

§«.  TtlM 

Having  succeeded  in  defining  the  price  of  any  kind  of 
wealth,  we  may  next  proceed  to  define  the  valm  ci  any  given 
quantity  of  that  wealth.  The  value  of  a  given  quantity  of 
wetUih  is  that  quantity  multiplied  by  the  price}  Arithmetic- 
ally e]q;>ressed,  if  the  price  of  wheat  is  f  of  a  dollar  per  bushel, 
then  a  lot  ccnudsting  of  3000  buihds  wouM  have  a  value  of 
3000  times  f  of  a  dollar,  or  icco  dollars.  Algebraically  ex- 
pressed, if  the  price  of  any  good  is  p  and  its  quantity  is  Q, 
its  value  is  expressed  as  In  otluer  words,  the  value  of  a 
certain  quantity  of  one  kbd  of  wealth  at  a  given  price  is  the 
quantity  of  aomeother  kind  lor  which  it  would  be  exchanged, 
if  the  whole  quantity  were  exchanged  at  the  price  set. 

The  distinctions  between  quantity,  price,  and  value  of 
wealth  may  be  illustrated  by  an  inventory  such  as  the  f ol- 
kwing :  —   


QCAMTXTY 

nut  DinnB  Of  wwn 

VALDi  m  nua 

or  WMBAT 

Dwelling  houw   .  . 
Wheat  

xooopain 

3001b. 

I  house 
100  bu. 

4I  bu.  *  per  pair 
1  bu.  per  pound 
10,000  bu.  per  houM 
I  bu.  per  budid 

4350  bu. 
60  bu. 

10,000  bv. 
100  bo. 

1  This  definition  of  value  departs  from  the  usage  of  smne  texllMokt,  but 
follows  closely  that  of  business  men  and  practical  statistidana.  Eomomitts 
have  sometimes  con&wd  "price"  to  what  is  in  this  book  called  mtmey  price 
and  a{^>Iied  the  term  "value"  to  what  is  here  called  price.  Other  econo- 
mists have  used  the  term  "price"  in  the  sense  of  market  price  —  what  an 
Kttida  actually  adk  for  —  wad  "value"  in  the  sense  of  appraised  price  or 
y— wwottopricB— iriatitoii^tostf  for.  Stffl  others  have  used  the  term 
"price"  in  the  sense  empfeyed  in  this  hocik,  but  "vaSm"  is  the  seme  of  the 
decree  of  mHwhi  ia  which  an  article  is  hdd  — iriiat  b  this  book  wiO  kttfbt 
called  "ma^inal  utility"  or  "marginal  desirability." 

i  "Bushds"  refers  to  bushels  of  wheat  throughout  this  table. 


X8  ELEMXNTAKY  PKINCIPLI8  OF  ICONOMICt  (Cmt.I 

The  three  columns  must  be  carefully  dntinguished. 
Only  in  special  cases  can  any  two  of  the  three  magnitudes, 
quantity,  price,  and  value,  be  identical.  The  Ubk  illua- 
tntet  these  special  cases.  Thus  in  the  last  line  we  find 
quantity  and  value  identical  became,  in  tUs  special  case, 
the  value  of  the  good  is  reckoned  in  terms  of  itself,— 
wheat  in  wheat.  In  the  line  above,  price  and  value  are 
identical  because,  in  this  special  case,  the  quantity  vahied  it 
only  one  unit  The  value  of  one  houae  k  the  pike  per 
house. 

The  measurement  of  various  items  of  wealth  in  respect 
of  "  value,"  eipieiied  in  terms  of  a  sbgle  commodity,  such 
as  wheat  or  money,  has  one  great  advantage  on  er  its  meas- 
urement in  respect  of  "  quantity."  This  advantage  is  that 
it  enables  us  to  translate  many  kinds  of  wealth  into 
one  kind  and  thus  to  add  them  all  togetiicr.  To  add 
up  the  "  quantity  "  column  would  be  ridiculous,  because 
pairs  of  shoes,  pounds  of  beef,  houses,  and  bushels  of 
wheat  are  unlike  quantities.  But  the  items  in  the  last 
cohmm  (representii^  values),  being  eipteased  in  a  smgle 
common  unit  (the  bushel),  may  be  added  together  de- 
spite the  diversity  of  the  various  articles  thus  valued  in 
bushds  of  wheat. 

Since  prices  and  values  are  usually  exfnutd  in  terms  trf 
money  —  the  most  exchangeable  kind  of  wealth  —  money 
may  be  said  to  bring  uniformity  of  measurement  out  of 
diversity.  In  other  words,  it  is  not  only  a  medium  of  ex- 
change, but  it  can  be  used  also  as  a  measw  ef  vakm.  It 
serves  as  a  means  of  comparing  values  of  different  things  by 
eipressing  them  both  in  a  common  denominator.  It  would 
be  &r  more  trouUe  to  compare  each  article  directly  with 
every  other  artkde,  for  there  would  be  many  nm  com- 
parisons. 

Although  this  reduction  to  a  common  measure  is  a  great 
practical  convenience,  we  must  not  imagine  that  it  gives  what 
could  in  any  lak  sense  be  called  **  the  only  true  meanae  " 


wiAunr 


19 


of  wmM.  In  fict,  to  miawnt  the  ammiiit  of  nwHli  by 
its  vahie  —  its  msMy  value  — is  often  misleading. 
The  money  value  of  car  wheels  exported  from  the  United 
States  in  one  month  was  |i  3,000  and  in  a  Uter  monti^ 
$15,000,  from  whkii  fact  we  idg^t  Infer  tteft  Obt  fMBlftr 
of  these  exports  had  increased.  But  the  rmiA»  of  emr 
wheels  exported  in  the  first  of  those  two  months  ws;;  2200, 
and  in  the  second  only  a  100,  showing  a  decreaae.  The 
price  had  increased  faster  than  the  number  had  iRntasd. 
Likewise,  the  figures  for  imports  of  coffee  in  ^ese  periods 
show  a  decline  in  dollars,  despite  an  increase  in  pounds. 
Here  the  price  had  fallen  faster  than  the  number  of  pounds 
had  risen.  It  is  conceivabie  that  die  qfuaaHty  ol  emy 
artide  mig^t  decrease,  an^  yet  the  ptkt  simultaneously 
incre&se  so  much  that  there  would  be  an  ai^>aren''  --"ase 
of  wealth  yrhta  there  really  was  nothing  of  the  kinu.  his 
is  apt  to  be  the  case  fai  times  of  infiaticm  of  th»  cansney. 

Even  when  we  are  confessedly  trying  to  measvK  value 
of  wealth  and  not  its  quantity,  it  b  difficult  or  impossible 
to  find  a  right  way.  Imports  into  the  United  States  from 
Mexico  hi  CM  year  were  wwUi  twenty-eight  n^lkas  oi 
American  gdd  doUan,  and  ten  years  later  their  vidue  was 
forty  millions  —  an  increase  in  value  of  forty-two  per  cent ; 
but  these  very  same  iofwrts  measured  in  Mexican  silver 
dollars  were  forty-one  laBkms  in  the  first  year  and  ninety 
millions  in  the  second  —  an  increase  in  value  of  nearly  one 
hundred  and  twenty  per  cent.  These  two  rates  of  increase, 
although  they  represent  exactly  the  same  facts,  do  not  agree 
with  each  other;  yet  the  Amnkan  merchant  reduma  the 
^ndue.  one  way,  and  the  Modcan  merchant,  the  other.  In 
a  senst  '  )th  are  right ;  that  is  to  say,  both  are  true  state- 
ments of  the  value  of  the  articles  imported,  (me  of  the 
yahie  hi  fold  and  the  other  of  the  vahie  in  sihmr.  If 
value  were  to  be  measured  in  iron,  copper,  coal,  cotton,  or 
any  other  article,  we  should  have  many  other  different 
"  values,"  no  two  of  which  would  necessarily  agree.  "  The 


ao  £L£MENTASY  PSINCIPLES  OF  ECONOMICS  [CSaf.I 

value  of  wealth,"  therefore,  is  an  incomplete  phrase;  to  be 
definite  we  should  say,  "  the  value  of  wealth  in  terms  of 
gold,"  or  in  terms  oi  some  other  particular  article.  Hence 
we  cannot  tmjAoy  T^ch  values  for  comparing  different 
groups  of  wealth,  except  under  certain  conditions,  and  to  a 
limited  degree.  To  compare  the  wealth  values  of  distant 
places  or  times  — as  America  and  China,  Ancient  Rome 
and  Modem  Italy  — will  inevitably  give  conflicting  and 
unsatisfactory  results. 

§  7.  limit  d  Accural  in  Economic  ICetmmnMilt 

We  have  learned  how  the  three  magnitudes  —  quantity, 
price,  and  value  of  wealth  —  are  usually  measured,  and  that 
their  measurement  is  practically  a  very  inaccurate  affair. 
Yet  in  the  minds  of  most  persmis,  even  of  business  men,  the 
degree  of  accuracy  attainable  is  exaggerated.   Even  in  the 
measurement  of  the  mere  quantities  of  wealth  there  are  two 
sources  of  error;  for  every  such  measurement  includes,  as 
we  have  seen,  two  elements:  a  tmii  and  a  number  or  ratio 
(as  the  pound,  and  the  number  of  pounds) ;  and  botii  the 
unit  and  the  number  or  ratio  may  be  inaccurate.  In 
modem  times  the  first  source  of  error  —  that  cf  the  unit  — 
is  practically  eliminated.  Our  units  of  weight  and  meas- 
ure are  standardized  by  law,  and  a  pound  in  Calfifomia  is, 
for  all  practical  purposes,  equal  to  a  pound  in  Connecticut. 
There  is,  moreover,  at  Washington  a  national  bureau  and  a 
q>ecial  building  for  preserving  and  testing  standards  of 
measurement.  Different  towns  have  their  seakn  of  wdghtt 
and  measures,  to  prevent  error  through  ignorance  or  fraud. 
Fraud  and  error  still  exist,  but  are  much  rarer  than  in 
former  times.   The  Egyptians  are  said  to  have  been  un- 
able to  test  the  accuracy  of  their  units  of  length  closer 
than  to  I  part  in  350.   The  Roman  weights  were  true  only 
to  I  part  in  50.  And  when  we  go  back  to  primitive  units, 
we  tad  that  thqr  were  very  rough  indeed.  A  yard  was 


probably  at  first  the  length  around  the  wabt,  which  naturally 
was  apt  to  vary  considerably.  So  also  the  distance  betmsa 

the  elbow  and  the  end  of  the  finger  was  taken  as  a  unit 
and  called  the  ell.  Fraud  was,  therefore,  as  easy  as  it  was 
conunon.  At  Bergen,  in  Norway,  among  other  relics  of 
the  old  Hanseatic  Leagiw,  are  the  scales  used  for  buyiiq; 
and  selling  fish,  with  two  sorts  of  weights  used,  one  con- 
siderably heavier  than  the  other.  The  heavier  were  used  for 
buying  and  the  lighter  for  selling !  Such  tampering  with 
we^ts  and  measures  is  probably  much  less  frequent  to-day, 
alt^ragh  instances  of  short  weights,  as  in  the  "  mpat  tnat 
frauds,"  are  often  brought  to  light. 

To-day,  therefore,  the  chief  source  of  error  lies  not  in  the 
unit,  but  in  toe  ratio  of  the  quantity  of  wealth  to  tint  unit 
In  retail  trade  the  inacctmicy  from  this  source  is  very  great. 
If  we  get  our  apples  or  potatoes  measured  correctly  within 
five  per  cent,  we  are  fortimate.  Wholesale  transactions 
are  more  accurate.  Probably  the  greatest  degree  of  accu- 
racy ever  attained  in  commercial  measurements  is  on  the 
mint  scales  employed  by  the  federal  government  in  Phila- 
delphia and  San  Francisco.  These  scales  weigh  accurately 
to  within  about  oat  part  in  two  niillicm. 

Besides  the  two  sources  of  error  in  the  measurement  of 
mere  quantity,  when  we  proceed  from  quantity  to  value, 
we  introduce  still  a  third  so\u-ce  of  inaccuracy,  viz.,  the  price 
factor  by  which  we  mult^dy  tbt  quantity  in  order  to  get 
the  value.  This  is  especially  true  if  the  price  be  merely 
an  "  appraised  "  price.  The  price  in  an  actual  sale  is  an 
absolute  fact  and  cannot  be  said  to  have  any  inaccuracy ; 
but  tht  pikx  at  wfaidi  we  estimate  that  a  tUng  woM  sdl 
under  certain  conditions  is  always  uncertain.  In  the  case  of 
"  staple  "  articles,  i.e.,  articl'^s  regularly  on  the  market,  a 
dealer  can  often  appraise  correctly  within  one  per  cent 
Real  estate  in  certain  parts  of  a  dty  where  sales  are  active 
can  s(mietimes  be  appraised  correctly  within  five  or  ten  per 
cent,  Imt  in  the  "  dead  "  or  out-of-the-way  parts  <^  won» 


93 


SLEKBNTAXY  FSIMCIPLBS  OV  IOOMOIIICB  iQB».l 


towns  where  sales  are  infrequent,  the  appraisement  be- 
comes merely  a  rough  guess.  Again,  in  the  country  districts, 
-  while  farms  in  the  settled  parts  of  Iowa  and  Texas  can  be 
appraised  within  ten  or  fifteen  per  cent,  in  the  backward 
parts  even  an  expert's  valuation  is  often  proved  wrong  by 
more  than  fifty  per  cent.  And  ^Hiere  a  sate  of  the  articte 
in  question  is  scarcely  conceivable,  an  appraisement  is  ahiKWt 
out  of  the  question.  To  estimate  the  value  of  YeJow- 
stone  Task  is  impossible,  unless  we  allow  ourselves  very 
wide  limits  of  amt} 

*  Stin  wider  limits  nniat  be  allowed  irimi  we  try  to  vahw  human  bdngs. 

We  can  often  give  a  lower  limit,  but  seldom  an  upper  one.  The  estimates 
may  vary  enormously  with  the  point  of  view.  It  is  sometimes  s&id,  "If  I 
could  buy  Mr.  So-and-so  at  my  valuation  and  sell  jim  at  his,  I'd  get  rich." 

Freemen  are  seldom  appraised  at  all.  '.'lien  the  slaves  in  the  South 
became  freemen,  they  ceased  to  be  appraised  as  wealth.  The  result  has 
been  somewhat  confusmg  to  our  census  statistics.  The  "Manufactuien* 
Rfoofd"  of  Baltimore  recently  issued  ^|uns  shoiring  a  sharp  dmp  in  the 
■Mond  valuatkms  of  wealth  in  the  South  after  the  war.  The  inference 
was  dnwB  that  the  value  of  wealth  had  immensely  decreased ;  but  a  large 
part  of  this  so-called  decrease  consisted  merely  in  the  change  of  ownership 
of  slaves  from  their  old  masters  to  themselves,  and  their  consequent  aaoB- 
sion  as  items  of  value.  Any  valuation  of  freemen,  should  exceed  that  of 
slaves;  but  even  on  the  basis  of  dave  values  the  total  valiw  of  the  lnwHtn 
beings  in  any  oooatiy  is  ehvays  peat^  is  enos  of  the  total  valas  of  aB 
other  wealth. 


CHAPTER  n 


nuxFBBxy 


}  Z.  HM  BMMtti  ol  WMlth 

The  definition  of  wealth  which  has  been  given  rettilcti 

it  to  Mincrete  material  objects  owned  „by  ?Mp.  Accord- 
ingly, wealth  has  two  essential  attributes:  materiality 
and  ownership.  Its  materiality  was  the  subject  of  t^e 
preceding  chapter;  its  ownership  will  be  the  subject  of 
the  pceaetit  chapter. 

To  own  wealth  is  to  have  a  right  to  the  benefits  of  wealth, 
and  before  proceeding  further  with  the  discussion  of  owner- 
ship, we  must  consider  these  "benefits"  of  wealth.  To 
own  a  kMif  of  bread  means  nothing  more  nor  less  than  to  have 
the  right  to  benefit  by  it  —  i.e.,  to  eat  it,  seU  it,  or  otherwise 
employ  it  to  satisfy  one's  desires.  To  own  a  suit  of  clothes 
is  to  have  the  right  to  wear  it.  To  own  a  carriage  is  to 
have  the  right  to  drive  in  it  or  otherwise  utilize  it  as  long 
as  it  lasts.  To  own  a  plot  of  land  means  to  have  the  right 
to  use  it  forever.  The  ultimate  objects  for  which  wealth 
exists  are  the  benefits  which  it  confers.  If  some  one  shoidd 
give  you  a  house  oa  condition  that  you  should  never  use  it, 
seU  it,  rent  it,  or  give  it  away,  you  n^t^t  be  justified  in  refus- 
ing it  as  worthless. 

Benefits  may  also  be  rendered  by  free  hmnan  bdngs  (who, 
acceding  to  our  broader  definition,  axe  included  under 
wealth).  Such  benefits  are  then  usually  called  services  ren- 
dered or  work  done.  When  rendered  by  t/dngs  rather 
than  persons,  benefits  are  commonly  called  ww.  Son^ 


34  ELEMENTARY  PSIKCZPLBS  <»  EOOZfOIIICS  (CBtf.n 

timw  benefits  consist  of  positive  advantages  and  sometimes 
of  the  prevention  of  disadvantages.  Benefits,  then,  mean 
aenrable  events  obtained  or  undesirable  events  averted  by  means 
of  wealth  or  free  human  beings.  For  example,  when  a 
loom  changes  yam  into  cloth,  the  transformation  is  a  de- 
sirable change  due  to  the  loom ;  it  is  a  benefit  conferred  or 
performed  by  the  loom.  The  benefit  from  a  plow  is  the 
turning  up  of  the  soil.  The  benefits  or  services  performed 
by  a  bncklayer  consist  in  the  laying  of  bricks.  The  benefits 
or  uses  conferred  by  a  fence  around  a  farm  consist  in  pre- 
ventmg  the  cattle  from  roaming  away.  The  dikes  in  Hol- 
tond  confer  the  benefit  of  keeping  out  the  ocean.  The 
benefits  conferred  by  a  diamond  necklace  consist  in  its 
pleasing  ghtter. 

Many  articles  confer  benefits  on  their  owners  by  yieldine 
them  money.  The  benefit  to  the  landlord  from  the  land  or 
bmlchng  which  he  lets  is  the  receipt  by  him  of  rent.  The 
benefit  to  the  owners  of  a  railway  from  the  railway  is  the 
receipt  by  them  of  their  dividends.  But  not  aU  benefits, 
of  course,  are  simply  the  receipt  of  money. 

To  be  desirable  to  the  owner,  an  article  must  confer  bene- 
fits on  the  owner,  but  not  necessarily  on  the  community 
at  large.   For  instance,  the  noise  of  a  factory  whisUe  may 
b«  a  nuisance  to  the  community,  but  as  long  as  it  is  service- 
able  to  the  owner  of  the  factory,  it  is  for  him  a  benefit. 
Benefits  to  the  owner  and  benefits  to  society  may  be  very 
d^erent  or  may  be  mutually  incompatible.   The  benefits  to 
iodety  are  of  the  greater  importance,  but,  under  our  present 
system  of  ownership,  the  benefits  to  the  owner  coniol  the 
prices  and  values  of  wealth.   In  oider,  therefore,  to  under- 
stand prices  and  val  :.s  as  they  are  actuaUy  determined, 
we  must  fix  our  attention  for  the  present  on  the  benefits  t<^ 
the  owner  rather  than  on  those  to  society 

ali^Z^r^  ^  ^  ''^^      ^  measured, 

a^thou^the  umts  of  measurement  are,  of  course,  not  th^ 
■ame.  We  measure  some  benefits  by  number— when  m 


Sk.*I 


FlOfUtTY 


count  the  strokes  of  a  printing  press.  We  measure  other 
benefits  by  time  —  as  when  we  reckon  a  laborer's  work  by 
the  number  of  hours  or  days  during  which  he  works.  Some 
benefits  we  measure  by  the  quantity  of  wealth  whichis  pro- 
duced or  treated  — as  when  the  work  of  a  coal  miner  is 
measured  by  the  amount  of  coal  he  mfaies,  or  when  the  use  of 
a  loMn  is  measured  by  the  number  of  yards  of  doth  it 
weaves,  or  when  the  services  of  a  lawn-mowing  outfit  are 
measured  by  the  number  of  acres  covered.  The  measure- 
ment of  services  or  benefits  is  usually  router  than  that  of 
wealth,  because  it  is  more  difl&cult  to  establish  units  of 
measure.  The  shelter  of  a  house  or  the  use  or  "  wear  "  of  a 
suit  of  clothes  is  difficult  to  measure  accurately.  To  save 
trouble,  benefits  are  usually  measured  by  time,  although,  as 
soon  as  it  becomes  profitable  to  do  so,  the  tendency  w  to 
establish  a  more  satisfactory  measure  "  by  the  piece." 

When  we  have  measured  the  benefits  of  wealth  or  of  free 
human  beings,  we  may  apply  to  them  the  same  concepts  ol 
transfer,  exchange,  price,  and  value,  which,  in  the  last  chap- 
ter we  applied  to  wealth.  We  have  seen  that  wealth  may 
be  exchanged.  The  same  is  true  of  benefits.  In  fact,  every 
exchange  is  an  exchange  ol  benefits;  for  to  exchange  weoft* 
is  really  to  exchange  the  benefits  of  wealth,  the  only  object 
in  gelt  ig  wealth  being  to  get  its  benefits. 

§  2.  The  Costs  of  Wealtli 

Opposed  to  the  benefits  of  wealth  are  its  costs.  Costs 
may  be  caUed  negative  benefits.  The  purpose  of  wealth  is 
to  benefit  its  owner ;  that  is,  to  cause  to  happen  what  he 
desires  to  happen,  and  to  prevent  from  happenmg  what  he 
desires  not  to  happen.  But  often  wealth  can  work  no 
benefit  without  entailing  some  cost,  ».«.,  preventing  what  is 
desirable  or  occasioning  what  fa  und«rabte.  For  iintance, 
one  cannot  enjoy  the  benefits  of  a  dwellmg  without  the  costs 
of  taking  caie  of  it,  either  thiou^  the  actual  labor  of  dean- 


36 


SUMKNTASY  FUHCIPLn  QV  BOOMOmcS    CCBAr  H 


ing,  heating,  repalimg,  and  keeping  it  in  order,  or  the  pay. 
ment  of  money  to  servants  for  such  purposes;  one  cannot 
get  the  benefit  of  flour  without  assuming  the  cost  of  knead- 
ing and  baking  it  into  bread ;  one  cannot  get  the  benefit  of 
a  farm  without  the  coat  of  tillhig  it  Whatever  wealth  brings 
about  to  the  pleasure  of  the  owner  is  a  benefit ;  whatever 
it  brings  about  to  his  displeasure  is  a  cost.  He  assumes  the 
costs  only  as  a  means  of  securing  the  benefits.  Costs  are 
thus  the  necessary  evils  which  must  be  if  we  are  to  obtain 
the  good  which  wealth  a£fords. 

Like  benefits,  costs  are  not  only  occasioned  by  wealth, 
but  also  by  free  human  beings.  An  employer  cari 
get  benefits  from  a  workman  only  at  the  cost  of  pay- 
ing him  wages;  an  independent  workman  can  get  bene* 
fits  from  his  own  exertions  only  at  the  cost  of  his  own 
labor. 

The  costs  of  wealth  or  of  free  human  bdngs  may,  of  course, 
be  measured,  just  as  benefits  are  measured  —  by  number,' 
by  time,  or  by  other  appropriate  units;  and  costs  wheri 
thus  measured  may,  by  price  and  value,  be  translated  into 
terms  of  money  precisely  like  the  opposite  items— benefits. 
We  must  beware  of  assuming  that  cost  is  always  in  the 
form  of  an  expenditure  of  money.   Such  money  cost  has 
received  exaggerated  importance  in  the  eyes  of  business 
men  and  has  tended  to  hkie  the  more  important  and  funda- 
mental kind  of  cost,  namely,  labor.  Even  labor  appears  to 
the  employer  in  the  guise  of  a  money  cost  —  the  expenditure 
of  wages.  This  expenditure,  however,  is  not  itself  labor 
Those  who  feel  a  real  labor  cost  are  the  laborers  themselves. 
It  IS  by  their  physical  and  mental  exertions  that  the  work 
of  the  world  is  chiefly  done. 

Sj.  Plroperty,  the  Sight  to  Benefits 

We  have  said  that  to  own  wealth  means  to  have  the 
rigkt  to  its  benefits.    We  have  seen  what  is  meant  by 


raonsnr 


"benefits,"  and  shall  nert  enmiiie  what  h  meant  by 
"rights."* 

A  property  right  is  the  liberty  or  permit  (under  the  sanc- 
tion and  protection  of  custom  and  law)  to  enjoy  benefits  oi 
wealth  (in  its  broader  sense)  while  assuming  the  costs  wfaidi' 
those  benefits  entail.  The  term  "  property  "  is  merely  an 
abbreviation  for  "  property  right  "  or  "  property  rights." 
Just  as  different  kinds  of  wealth  are  more  or  less  exchange- 
able, so  different  kinds  of  property  rights  differ  greatly  in 
eiduaigeability.  Those  forms  which  are  most  tatBy  and 
commonly  exchanged  arc  of  most  importance  for  our  study. 
Those  the  exchange  of  which  is  infrequent,  difl&cult,  or  for- 
bidden, are  in  fact  seldom  thought  of  as  property  rights  at 
all,  althoui^  lopc^lfy  they  must  be  included  in  that  caAt- 
gory.  In  the  modem  world  the  right  of  a  parent  over  a 
child  or  of  a  husband  over  a  wife  is  not  by  ordinary  usage 
called  property;  for,  except  in  certain  remote  ctODtm  ol 
the  earth,  thdr  ecdiiinge  u  tabooed. 

It  will  be  observed  that  property  rights,  unlike  wealth  or 
benefits,  are  not  physical  objects  nor  events,  but  are  abstract 
social  relations.  A  property  right  is  not  a  ^IKuj.  It  is  that 
nhHm  ef  man  to  things,  caUed  mnmhip.  It  is  in  this 
human  relationship  to  wealth  that  we  are  moat  interested, 
and  not  in  the  physical  objects  as  such. 

The  benefits  flowing  from  wealth  require  time  ftar  their 
occnrtenoe  and  are  tiierrfore  dther  past «:  future.  The  past 
and  the  future  are  separated  by  the  present,  which  is  a  mere 
point  of  time.  The  only  benefits  from  wealth  which  can  be 
owned  at  this  present  point  of  time  are  future  benefits. 
Past  benefits  hhVe  vanidied.  When  a  man  owns  any  form 
of  property,  he  owns  a  right  to  future  benefits.  The  idea  of 
"  futurity  "  is,  therefore,  implied  in  our  definition  of  property, 
which  may,  therefore,  be  more  explicitly  expressed  as  follows : 

1  At  we  have  seen  that  "benefito"  may  be  orciBkinfitl  not  onbr  by  wealth 
fai  to  narrow  sense,  but  by  ftee  kunun  Msp.  «•  AaB  coalite  "lll^'' 
to  bwi&a  from  both  of  tbeae  aotacta. 


S8  SLZlONTA&y  PUNCIPLJB8  OV  MOOmOMKB  fC^ll 

JProperty  is  the  right  tofuime  hemfUi  «§  imkk  (im  its  hroadtr 

sense).  It  is  also  to  be  observed  that  the  future  is  always 
uncertain;  no  man  can  ever  teU  in  advance  exactly  how 
much  future  benefit  he  can  obtain ;  he  can  only  take  the 
chances  and  risks  involved.  Consequently,  the  idea  of  un- 
certainty is  also  implied  in  our  definition  of  property,  which 
naay,  therefore,  be  still  more  explicitly  expressed  as  follows : 
Property  is  the  right  to  the  more  or  less  probable  future  benefits 
of  wealth  (in  its  broader  sense). 

^  If  a  man  has  the  right  to  all  the  benefits  which  may  come 
m  the  future  from  a  particular  arUcle  of  wealth,  he  is  said 
to  have  its  complete  ownership,  or  its  ownership  without 
ttKMmbrance.  If  he  has  a  right  to  only  some  of  the  bene- 
fits trom  a  particular  article  of  wealth,  he  is  said  to  own  that 
wealth  partiaUy,  or  to  "  have  an  interest "  in  it.  When 
two  brothers  own  a  farm  equally  in  partnership,  each  is  a 
part  owner;  each  has  a  half  interest  in  the  farm;  that  is, 
each  has  a  right  to  half  of  the  benefits  to  be  had  from  the 
farm.  What  is  divided  between  the  two  brothers  is  not 
the  farm,  but  the  benefits  of  the  farm.  To  emphasize  this 
fact,  the  law  describes  each  brother's  share  as  an  "  undivided 
half  interest."  Partnership  rights  are  usuaUy  employed  only 
when  the  number  of  coSwners  is  smaU.  When  the  number 
is  large,  the  ownership  is  usually  subdivided  into  shares  of 
stock;  but  the  principle  is  the  same  — each  individual  owns 
a  right  to  a  certain  fraction  of  the  benefits  iHiidi  come  to 
the  owners. 

After  the  quantities  of  property  of  different  kinds  are 
measured,  we  may  apply  the  same  concepts  of  transfer, 
exchange,  price,  and  value  which  have  already  been  applied 
to  wealth  and  benefits,  each  particular  kind  being  measured 
m  Its  own  particular  unit.  Consider,  for  example,  the  prop- 
erty caUed  stock  in  the  Ftensylvania  Railway  Company. 
This  is  measured  t>y  the  "  number  <rf  shares,*'  ^  share  here 
being  the  unit  of  measurement. 

It  is  important  that  the  student  should  become  accus- 


fMHEin 


tomed  to  see  the  real  basis  underlying  property  rights.  This 
iMMbbd^CTimlth  or  free  penoDt,<Hr  both.  Practically  it 
is  usually  wealth.  A  mortgage  is  based  on  land,  and  great 
care  is  taken  not  to  have  the  mortgage  too  large  for  the  basis 
on  which  it  rests.  Raikoad  stocks  and  bonds  are  based  on 
the  real  railway.  Personal  notes  are  based  partly  on  the 
penKm  teuing  them  and  partly  on  his  wealth.  A  street 
railway  franchise  is  a  property  right,  the  physical  basis  of 
which  consists  in  the  streets.  Sometimes  the  property 
lights  axe  removed  several  stqps  from  the  real  bads.  If  a 
number  of  factories  are  combined  into  a  "  trust,"  the  origi- 
nal stockholders  surrender  their  stock  certificates  to  trustees 
and  receive  in  their  place  trust  certificates.  Their  rights  are 
then  a  claim  against  the  trustees  who  hold  the  stock  which 
represents  the  factories.  The  ultimate  basis  for  their  ri|^ls 
is  still  the  factories,  but  their  ownership  is  indirect. 

The  future  benefits  flowing  from  wealth  may  be  compared 
to  a  pennant  attached  tc  a  flagstaff  — a  long  streamer 
stretching  out  into  the  future.  Two  of  the  possible  ways 
in  which  the  present  ownership  of  these  benefits  may  be  sub- 
divided are  indicated  in  Fig.  i.  Here  are  two  "  streamers  " 
representing  the  streams  of  ben^ts  which  may  caum  from 
a  dwelling  house. '  These  begin  at  the  present  and  stretch 
out  indefinitely  into  the  future.  If  two  brothers  own  the 
house  in  partnership,  each  has  a  right  to  half  the  shelter 
of  the  house,  i.e.,  to  half  of  its besefits;  the  benefits  are 
therefore  divided,  so  to  speak,  Umgiitidinally  in  time. 

But  if  the  house  is  rented,  the  division  of  benefits  between 
the  toiant  and  the  landlord  is  transverse,  as  shown  in  the 
lower  **  streamer of  the  diagram.  The  tenant  has  all  the 
shelter  of  the  house  until  the  time  when  his  lease  is  to  expire, 
while  the  right  to  all  shelter  beyond  the  time  of  the  lease 
rests  in  the  landlord,  either  to  use  himself  or  to  sell  to 
others  by  new  kases. 

These  are  not,  of  course,  the  only  ways  in  which  future 
benefits  may  be  parceled  out  among  their  several  owners, 


but  they  an  the  prindpal  and  usual  modes  of  sub- 

division. 

In  common  speech,  the  minor  rights  to  wealth  are  not 
ordinarily  dignified  as  rights  of  ownership.  Thus  a  tenant's 

  ri^t  in  the  dwelling 

B'>  3HAWC  orrvrmt  esrcwra.  f      occupies  b  shar|dy 


A»  SKAReorpuTUNEacNcmak 


~7  he  occupies  b  shar|dy 

■4  distinguished  from  the 
J  right  of  the  owner. 


TCNANTS 


right  of  the  owner. 
Yet,  strictly  speaking, 
eveiy  right  to  the 
benefits  of  wealth  or 

LANouoRtfs  /  f ^      ^^^^  of  free 
SHARE     1  human  beings,  how- 
 —  J  ever  insignificant  that 


RwsEfcr  "ght  may  be,  is  a  part 

INSIANC  ownership.  When  an 

Fic.  I.  owner  of  land  wishes 

,     .  ^. ,    ,  to  give  an  uimicum- 

bered  tiUe,  he  finds  it  necessary  to  extinguish  all  out- 
standing leases,  or  claims  for  future  benefits,  often  at 
considerable  cost.  It  is  the  total  ownership  which  he  is 
selling,  and  the  total  ownership  ahUrays  includes  the  owner- 
ship  which  the  tenant  enjoys.  Thus  the  tenant  of  a 
dweUing  is,  to  a  very  slight  extent,  a  part  owner  of  that 
dwelling.  In  the  same  way  the  employer  is,  to  a  very 
slight  extent,  a  part  owner  of  the  employee. 

§  4-  The  Relation  between  Wealth  and  Pkepeity 

We  have  thus  far  considered  three  very  important  and 
fundamental  concepts:  wealth,  benefits,  and  property  A 
convement  coUective  term  for  aU  of  them  is  "  goods." 

Wealth  and  property  are  only  present  representatives  of 
future  benefits  and  future  costs.  Wealth  (in  its  broader 
sense)  is  the  present  means  by  which  we  secure  future  bene- 
fits; while  property  is  the  present  right  to  these  benefiti^ 


ntuHuunf 


and  80  to  the  wealth  (in  its  broader  lense)  which  yields 
them.  It  foOowB  that  wealth  (hi  its  broader  sense)  oo 

the  one  hand,  and  property  rights  on  the  other,  may  be 
said  to  correspond  to  one  another.  The  wealth  (including 
free  human  beings)  consists  in  real  tangible  things,  while 
the  i»operty  lif^ts  rqpresent  ^tangible,  abstract  relations 
which  persons,  as  owners,  hold  toward  them  (the  wealth, 
including  free  human  beings).  Wealth  and  persons  are 
the  unportant  things;  property  is  the  human  right  of 
owiiersl^  of  the  wealth  or  of  the  services  of  free 
human  beings.  In  specific  cases  we  can  readily  see  the 
correspondence  between  the  wealth  and  its  ownership. 
In  fact,  in  cases  where  wealth  is  owned  imencumbered 
or  comi^etdy,  the  oorreqxmdence  is  altogether  too  ob- 
vious; so  obvious  that  in  ordinary  parlance  the  two 
terms,  "  wealth "  and  "  property,"  become  confused,  as 
when  speaking  of  a  piece  of  wealth,  in  the  form,  say,  of 
famd,  we  call  it  a  "  pkce  (d  property." 

On  the  other  hand,  where  the  ownership  is  minutely 
3  ibdivided,  the  wealth  and  the  property  rights  to  that 
wealth  become  so  dissociated  in  our  minds  that  we  are  apt 
to  fan  into  the  opposite  error,  and  entheiy  lose  s^^  of 
then-  connection.  For  instance,  when  railway  shares  are 
sold  in  Wall  Street,  the  investor  rarely  thmks  of  those  shares 
as  connected  with  any  actual  wealth.  All  that  he  sees  are 
the  engraved  certificates  of  his  ^operty  tights;  Iw  hmiio 
visual  picture  of  the  railway.  Sometimes  the  rights  are  so 
far  separated  from  the  thing  to  which  the  rights  relate,  that 
people  are  imaware  that  there  is  anything  behmd  the  rights 
at  aB,  and  delude  themselv  ^  vith  the  notion  that  there 
need  not  be  anything  behind  them.  A  government  bond,  for 
instance,  is  often  regarded  as  p.  kind  of  property  behind  which 
there  is  no  wealth.  But  if  we  examine  the  case,  we  shall 
find  that  the  wealth  o£  the  entire  aH&munity  h  bd^td 
this  property  right;  fcr  it  is  b>  means  of  the  taxing  power 
that  the  bonds  are  to  be  paid,  and  this  tazmg  power  can 


i»         lUKENTASY  nUNCDUS  Of  fWMftHltH  Jj 

oofy  be  effective  by  mmm  erf  wedth  (including  freemen) 
«»urces  of  mcome.  For  dUes  in  fact,  this  ifd^^ 
m^oxed;  there  is  u.uaUy  a  legal  debt  limit  e:^r«S 

W^rs  that  there  sJiall  lUway.  be  svflldeDt  real  wealth 
behmd  the  aty  bonds  to  make  thdr  ultimatie  pmyma^ 


?*  '^^'^^'^y  listinguish  in  his 

«4jd  between  the  thwe  important  concepts,  wealth  (S! 
eluding  man),  benefits  and  property,  but  he  should  mSd 

tMt  coooept,  namely,  cerhficaUs  oi  ownership.    To  avra'd 
2u«de«tanding.  it  is  often  nece«.ry  that  p'perty  ri^u 
should  be  evidenced  by  written  documents  Umakm^ 
such  written  evidence  or  certification  of  propertv  H^tTaie 
^!r.'^         recdpted  bills  for  goods  bou.  t  and  paid 
fer^«qsr.v«<i  stock  certiicate^  mflway  tickets,  signed  prom- 
issory notes,  wntten  contracts  with  laborers  to  "woA  mt** 
asm  of  moneyadvanced,  etc.   It  is  dear,  however,  that 
■oca  inlttea  evidence  of  property  rights  is  very  diflFerent 
from  the  property  rights  themselves;  and  in  ^y  ca^ 
sudi  rights  exist  without  any  written  evidence.  IWtbe 

Sr^'ijJ'*"  S  o^  sheep,^ally 

^  no  written  evidence  of  property  rights  in  them.  Or, 
two  brothers  might  own  and  open^  a  farm  in  partnership 
without  any  wntten  evidence  as  to  their  partneSo  fU^' 
their  respective  -ights  in  the  products  of  the  fam  ^ 
•gam.  one  person  might,  without  written  evidence,  least^ 
(say)  a  cottate  for  a  season  from  a  friend.  In  eU  these 
cases,  there  are  no  documentary  evidences  of  propertv 

the  fiwt  ase  the  right  is  complete;  in  the  other  two  cases 
partial,  the  benefits  being  subdivided,— to  eMtcaaekifc 
jitudinalty,  in  the  other, ' 


33 


Is. 


Ite  iniPiriin  Mt  to<S(^c8  awtt  important  types  of 
piupaly,  and  dbows  in  <  ach  ^  ne  w«*alth  on  which  the 
property  ri^t  is  based  and  t  benefits  accruing  inm  that 
wealth.  The  most  in^portant  forms  are:  vaneaambend, 
stocks,  boBds,  notes,  teases,  and  partacnhip  eii^ts. 


ViriCAL  CAv      ILLT    .     -HNG  rm  '5X1 

WEALlSr  BEHIN'    PROl  ^  KlGH^S 


tlUi 

WW  Cm 

BSIR> 


Om 

M 

feKdOMl  ia- 


later 


DmUing 


W< 


T  .    >!  MOM  ftr 
etc 

mnspaitatiMi 

Payment  ol "  in- 
terest "  tad 


Stecif 
«to 

k 

^«af  tmat 

find  dste 

Kilkt  to 

Sadtxip 

Ki^  to  Mm 

■■ti^to 


BW«  to 
fl^ft  toooBit' 
m  to 


Am 


Dho 


Koto 


ELEHENTASY  PSINCIPLES  CNP  BOONOMICS  (CkAV.n 


1 6.  Kcactical  RroUemt  of  Pgngitttf 

We  have  seen  that  wealth  (induding  man),  on  the  one 
hand,  and  property  rights,  on  the  other,  conespond  to  each 
other.    When  we  treat  of  the  welfare  of  a  community,  we 
think  rather  of  wealth  (in  its  broader  sense)  than  of  prop- 
erty.   When  we  treat  of  the  welfare  of  an  individual,  we 
think  rather  of  property  than  of  wealth.  This  fact  of  corre- 
spondence  between  property  rights,  on  the  one  hand,  and 
wealth  (including  man),  on  the  other,  should  be  empha- 
rised,  because  it  will  save  us  from  confusions  which  are  all 
too  common,  and  it  will  save  us  also  from  many  practical 
blunders  growing  out  of  these  confusions.   If  our  State 
legislators  understood  this,  there  would  be  less  of  the 
iniquitous  double  taxation  that  is  the  bane  of  the  present 
systems  of  State  and  local  taxation.   Such  unjust  ♦*TTtfkm 
is  illustrated  by  the  case  of  the  Massachusetts  factory  owner 
who  decided  to  transfer  his  property  to  a  stock  company  of 
which  he  himself  should  hold  all  fhe  stock.  Previously  he 
paid  taxes  only  on  the  factory  itself;  but  when  the  "  com- 
pany "was  formed  (under  a  Maine -charter),  the  tax  collector 
came  along  and  informed  him  that  henceforth  not  only 
must  the  "  company  "  pay  taxes  on  the  factory,  but  that 
he  personally  must  pay  taxes  on  the  stodc  abo,  sbce  stock 
in  a  Maine  company  is  taxable  "personal  property." 
Thus  the  owner  was  taxed  both  on  the  stock  which  repre- 
sented the  factory  and  on  the  factory  itself.  Instances 
of  double  taxation  are  quite  amumm  bi  the  United  States, 
though  they  are  not  all  so  self-evident  as  this.  It  is  not 
within  the  scope  of  this  book  to  discuss  taxation  or  other 
practical  problems  of  economics.    The  object  of  this 
section  is  merely  to  point  out  what  practical  pioUems  are 
related  to  "  property." 

Many  of  the  eosI  important  problems  of  economic 
policy  are  problems  of  the  form  of  ownership  of  wealth. 


3S 


The  great  questkm  of  slaveiy,  fnr  intaiiioe,  tamed  vpaa  the 
questkm  whether  one  man  should  be  owned  by  another. 

A  more  moaem  problem  of  property  is  that  of  perpetual 
franchises.  Is  it,  for  instance,  good  public  poUcy  to  grant  to 
A  street  railway  company  in  perp^idty  the  ri^^t  to  use  a 
dtf%  streets?  Or  ought  we  to  fix  a  time  limit,  say  fifty 
years,  after  which  the  right  shall  revert  to  the  dty?  A 
kindred  question  has  been  raised  as  to  private  property  in 
land.  1b  it  wfae  puMic  pdicy  that  the  present  f<mn  of  hmd 
ownership  iu  Tee  simple  should  continue?  Ought  a  man 
to  have  the  right  to  a  piece  of  land  forever,  perhaps  abus- 
ing that  right,  obstructing  others,  and  neglecting  the  oppor- 
tmdties  wfaidi  it  affords;  <Hr  should  the  government  own 
the  land  and  lease  it  to  individuals  for  limited  periods? 
This  question  is  now  being  discussed  with  reference  to  our 
mineral  lands,  and  particularly  our  coal  lands  in  Alaska. 
Questkms  of  huki  owMrship  have  in  all  ages  vend  ram's 
mhids  and  been  tLe  soiirce  of  social  unrest.  Rome  had 
her  agrarian  tnmUes,  not  unlike  those  of  modem  England 
and  Ireland. 

Jht  r^t  to  bequeath  property  is  also  a  prfane  source  of 
trouble.  This  right  to  dispose  of  property  by  will  has  not 
always  been  recognized.  It  was  developed  by  the  Romans, 
from  whose  system  of  law  we  borrowed  it.  Even  now  it 
b  a  Ihnited  right,  and  its  exercise  dttfers  with  tow  and  cnstom. 
These  differences  are  responsible  for  peasant  proprietorship 
in  France  and  for  primogeniture  in  England.  The  right  has, 
indeed,  been  Umited  so  as  to  prevent  the  perpetual  tying-\q> 
of  an  estate  by  a  testator.  Its  fiirther  fimitalioaiviB  prob- 
ata be  one  of  the  problems  of  the  future. 

An  even  broader  question  of  the  same  sort  b  the  question 
of  sodalbm.  Shall  we  discontinue  what  b  called  private 
property,  except  in  tiie  iMa^n  that  we  wear  and  eat»  and  poa* 
sflbfy  the  hmisrs  hi  which  we  live?  That  b,  shall  we  allow 
our  railways  and  ova  factories  to  be  owned  by  private  indi- 
viduab?  Or  shall  they  be  owned  by  the  omimunity  at 


36          ELEMENTARY  PRINCIPLES  OP  ECONOMICS  {Cmt.O 

large  SO  fjat  we  may  aU  have  shaiw  in  them,  as  we  already 
havem  the  post  office  and  the  government  printing  office ? 

Ttese  m  tome  of  the  greatest  problems  in  economics; 
and  they  are  piobienis  concenittg  tlie  ownership  of  wealth. 

answers  to  these  questions  do  not  come  within  the  pur- 
R    of  this  book,  which  is  concerned  merely  with  principles. 


CHAPTER  m 


CAFITAI, 

1 1.  Ctpttii  ttd  beooM 

In  the  foregoing  chs^ters  we  have  set  forth  several  funda- 
mental concepts  of  ecMwrnics  —  wealth,  i»operty,  benefits, 
iwice,  and  value.  We  have  seen  that  wealth  in  its  broader 
sense  includes  human  beings,  and  that  property  in  its 
broader  sense  includes  all  rights  whatsoever ;  that  benefits 
tn  the  desirable  occurrences  which  happen  throui^  wealth 
(k  its  broader  sense) ;  that  prices  are  the  ratios  of  exchange 
between  quantities  of  goods  of  various  kinds  (wealth, 
property,  or  benefits) ;  and  that  value  is  price  multq>lied 
by  quantity.  These  concepts  are  the  chief  tods  needed  in 
economic  study. 

Little  has  yet  been  said  about  the  relation  of  these 
various  magnitudes  to  Hme.  When  we  speak  of  a  certain 
quantity  of  wealth,  benefits,  or  property,  we  ntty  nCer  cither 
(i)  to  a  quantity  ezbting  at  a  particular  instant  of  time,  or 
(a)  to  a  quantity  produced,  exchanged,  transported,  or  con- 
sumed during  a  particular  period  of  time.  The  first  is  a 
of  roods";  the  second  is sjlMP  of  "goods.''  Ei- 
amples  of  stocks  are  the  stock  in  trade  of  a  merchant  on 
a  cotain  date,  the  cargo  of  wheat  on  board  a  ship,  the 
•mount  of  food  'V  \  pantry  at  a  particular  instant,  the 
number  of  sharr^  o  <  '!io^  owned  a  particular  imfividial 
in  a  particular  cc  ;  oration  at  a  particular  date.  Examples 
of  flows  are  the  sales  of  merchandise  made  in  the  course  of 
a  ^voi  month  by  a  given  merchant,  the  amount  of  wheat 

ST 


38 


SLmiBirrABy  psnicipm  or  sconomicb  fCktf.  m 


imported  into  a  given  country  during  a  given  year,  the 
quantity  of  food  consumed  by  a  family  in  a  giv«n  wedc, 
tiie  sales  of  a  given  kind  of  stock  on  the  New  York  Stock 
Exchange  during  a  given  number  of  days,  the  transporta- 
tion accomplished  by  a  railway  in  the  course  of  a  certain 
year,  the  woi^  done  by  a  given  man  in  a  given  time. 

The  most  important  purpose  of  the  distinction  betweoi  a 
stock  and  a  flow  is  to  differentiate  between  capital  and  income. 
Capital  is  a  stock,  and  income  a  flow.  This,  however,  is  not 
the  only  difference  between  cai^tal  and  iiu»me.  Iliere  is 
another,  equally  important ;  namely,  that  capital  consists 
of  wealth,  while  income  consists  of  benefits.  We  have, 
therefore,  the  following  definitions :  A  stock  of  wealth  existing 
at  a  given  instant  of  time  is  called  capital:  a  flow  of  benefits 
from  wealth  through  a  period  of  time  is  called  income. 
Many  authors  restrict  the  name  capital  to  a  particular 
kind  or  species  of  wealth,  or  to  wealth  used  for  a  particular 
purpose,  such  as  the i»oductk>n  ol  new  wealth;  in  short,  lo 
some  specific  part  of  wealth  instead  of  any  or  all  of  it. 
Such  a  limitation,  however,  is  not  only  difllcult  to  make, 
but  cripples  the  usefulness  of  the  concept  in  economic 
analyns.^ 

A  dwelling  house  is  capital;  the  shelter  or  the  rent  it 
affords,  during  any  given  period  of  time,  is  income.  The 
railways  of  the  country  are  capital ;  their  benefits  (in  the 
iam.  ct  tranq)ortati(m  or  its  equivaknt  in  dividends)  are 
the  income  they  yield. 

The  term  capital  is  also  applied  to  a  stock  or  fimd 
of  property  existing  at  an  instant  of  time.  But  such 
**  capital  property  "  is  not,  of  coune.  In  addition  to  "cap- 

'Just  as  wealth  may  be  consideted  in  a  broader  sense  as  including 
freemen,  so  capital  may  also  be  considered  in  this  broader  sense.  Thus 
an  individual,  because  of  his  abiUty  to  w(»k,may  be  onsideiwl  as  capital, 
while  the  benefits  resuHfasg  bam  iahet  (lerHea  rendered  employer  or 
•rif)  should  be  considered  as  income.  However,  in  the  following  dis- 
eiiMioa  <rf  "  capital,"  we  dull,  except  where  the  contrary  is  expressly 
■Utad,  use  the  term  in  its  narrower  hum. 


CAPITAL 


39 


ital  wealth,"  but  merely  instead  of  it ;  for  we  have  seen 
that  wealth  and  property  are  coextensive.  The  only 
true  ci^tal  of  society  as  a  whole  is  its  capital-wealth, — 
its  lands,  railways,  factories,  dwellings,  and  in  its  broader 
sense  its  human  inhabitants  also ;  but  since  the  owner- 
ship of  many  of  these  things  is  subdivided,  the  capital 
oi  an  individual  can  oftoi  be  stated  oafy  in  terms  of 
prq)erty— his  stocks,  bonds,  mortgages,  personal  notes,  etc 

§  a.  Capital-goods,  Capital-value,  Capital-balance 

We  have  defined  capital  as  a  stock  of  wealth  existing 
at  a  given  point  of  time.  An  instantaneous  photogri^  of 
wealth  would  reveal,  not  only  a  stodc  <rf  duraWe  wealth, 
but  also  a  stodc  ol  wealth  more  rapid  in  consumption. 
It  would  disclose,  not  the  annual  procession  of  such  wealth, 
but  the  members  of  that  procession  that  had  not  yet  passed 
off  the  stage  of  existence,  however  swiftly  they  might  be 
moving  acrosB  it.  It  would  show  trainloads  of  meat,  egg^ 
and  milk  in  transit,  as  well  as  the  contents  of  private  store- 
rooms, ice  chests,  and  wine  cellars.  Even  the  suf^lies  on 
the  table  of  a  man  bolting  his  dinner  would  fimi  a  place. 
So  the  dotbes  in  om'b  wardrobe,  or  on  one's  badt,  the 
tobacco  in  a  smoker's  pouch  or  pipe,  the  oil  in  the  can  or 
lamp,  would  all  be  elements  in  this  flashlight  pictiire. 

We  have  seen  in  the  lai^  two  da^tea  that  wealth  and 
prqierty  may  be  measmed  either  by  qua&tMes  (such  as  so 
many  bushels  or  pounds  or  so  many  shares  or  bonds  of  a 
particular  description)  or  by  value  (such  as  so  many  dollars' 
worth).  When  a  given  coUection  of  capital  is  measured  ia 
teroM  (A  the  quuitities  ^  the  various  goods  of  which  it  b 
composed,  it  is  called  capital-wealth  or  capital-property  or, 
to  include  either,  capital-goods;  when  it  is  measured  in 
terms  of  its  value,  it  is  sometimes  called  eapiUd^vdhu. 

One  ol  the  bert  metlKtds  of  understandhig  the  nature  of 
capital  is  to  understand  the  method  oi  keeping  capital  ao* 


40        SUiBNZAay  nXHOKBl  or  SCQMOMICS  iQu».in 

owmte.  We  shall,  therefore,  in  tte  remainder  of  this  chapter 
Mcate  ioine  of  the  iMindples  of  capital  account  Such 
a  study  IS  useful  not  only  beouiae  it  enahte  ut  toLp  our 

own  capital  accounts  and  to  understand  the  acc^  of 
banks,  railways,  and  other  institutions  as  pubUshed.  but. 
what  B  more  toportant  for  our  present  purpose,  biaua^ 
It  shows  how  in  the  present  complicated  ««M  of  Mdil 
ownership  of  capital,  with  its  interrelated  arrangement  af 
8t^  bonds,  debts^  credits,  the  capitals  of  individuals 
dovetaa  into  ow  anotiier,  forming  together  the  capital  of 
the  commumty.  — t"""  "* 

T  ''^^^^"^  '^^^  ^  statMwit  of  tbe 
SS^f^  t  °^  the  wealth  of  a  specific  owner  at  any 
mstant  rf  time.   It  consiiis  of  two  columns  -  the  assets  and 

^y^i^y^-?'^  negative  items  of  his 

^  habihties  of  an  owner  are  his  debts  and  obBgatioH, 
oflttre,  that  IS,  they  are  the  property  rights  of  others  for 
wkch  this  own«r  is  t«ponsible.  The  assets  or  resources  of 
theowner  mclude  all  his  capital,  irrespective  of  his  HafaiHties. 
Tte«  a^ts  mclude  both  the  capital  which  makes  good 
thelubihties,  and  that,  if  any,  in  excess  of  the  Habilitir^ 
ae  owner  may  be  either  a  physical  human  being  or  an 
abs^ct  entity  called  a  "fictitious  person  "  mi^  of" 
^on  of  human  beings  and  keeping  a  balancfsheet 
dfathict  from  those  of  the  individuals  composing  it  Ex- 
amples  of  fictitious  persons  are  an  association,  a  partner- 

to  «  f-  K-r  *  8«vermnent.  With  respect 

tea  debt  or  hability,  the  person  who  owes  it  is  the  deb^ 

I3L  iLS'^''*r'^  The  difference  in 

value  between  the  total  assets  and  the  total  habiUties  in 
any  capital  account  is  called  tbe  capital,  or  caHtat- 
io/anc.  o  the  person  or  company  whose  account  it  is 

m«^rr^'^  ^^"^  to  it  and  as  owing  its'individ- 
^  members  for  their  respective  shares;  wnsequentiy 
there  IS  no  net  capital-balaace  bek»»ging  tolSficti5«i 


Sk.  a] 


CAPITAL 


person,  although  in  most  cases  there  is  a  liability  item 
called  capital  which  represents  what  is  owed  to  those 
most  responsible  for  the  mamtgement  of  tlw  busnesi. 
The  most  inqwrtant  example  of  a  fictitious  person  is  a 
joint  stock  company.  This  may  be  roughly  described  as 
an  aggregation  of  individuals  uniting  for  Uie  purpose  of 
holding  property  jointly,  and  so  organised  that  the  in- 
dividual shares  of  ownership  and  management  are  repre- 
sented by  "stock  certificates."  Associated  with  the  stock- 
holders are  usually  also  bondholders  without  voting  power, 
but  with  the  right  to  receive  fixed  paymaits  stipulated 
M  the  b«ul8  which  they  hold.  The  "  capital "  item  in 
&e  capital  accoimt  of  a  joint  stock  company  is  a  liability 
due  to  the  stockholders.  It  represents  what  is  left  after 
the  value  of  all  other  liabilities  is  deducted  from  the  vaSm 
the  asseto. 

The  items  in  a  capital  account  are  constantly  chang^, 
as  also  their  values;  so  that,  after  one  statement  of  assets 
and  liabilities  is  drawn  up,  and  another  b  constructed  at  a 
later  tfaie,  the  balandng  item,  or  net  captal,  may  have 
changed  considerably.   However,  bookkeepers  are  accus- 
tomed to  keep  this  recorded  "capital"  or  "capital-balance" 
item  unchanged  from  the  beginning  of  their  account,  and 
to  <^aiacteritt  any  increase  <rf  it  as  "  surplus  "  ot  '*  un- 
divided profits  "  rather  than  as  capital.   There  are  several 
reasons  for  this  bookkeeping  policy.  In  the  first  place, 
the  less  often  the  bookkeeper's  entries  are  altered,  the 
simi^  the  bookkeeping.    Again,  by  sUting  separately 
the  origmal  capital  and  its  later  increase,  the  books  show 
at  a  glance  what  the  history  of  the  individual  or  conq>any 
has  been  as  to  the  accumulatk»s  of  net  capital  Flnlfy, 
hi  iht  case  <tf  joint  irtock  oooqtanies,  the  stockholders' 
capital  b  rq)resented  by  stock  certificates,  the  engraved 
"face  value"  of  which  cannot  conveniently  be  altered 
to  keep  pace  with  changes  in  real  vthte.  CoonqiMsitly, 
it  k  cnHooyuy  lor  bookkacpcra  to  maiiitain  the  book 


43         SLBKENXAtY  ttmcatMM  Of  WCOKOMKi   jTWir  m 

value  Of  the  recofded  "capital."  or  "capital-balance." 
equal  to  the  face  value  of  the  certificates  But  tUt  book- 
keeping  policy  does  not  alter  the  fact  that  at  a  gtven  instant 
the  Itockholders' capital  consists  of  the  entire  excess  of  as- 
■ets  over  liabilities,  including  in  that  excess  the  accumulaS 
surplus  and  undvided  profits.  If  the  excess  of  assets  oS 
habihties  be  added  to  the  liabilities,  the  two  sides  of  the 
account  will  cMcUy  balance.  A  capital  account  so  made  out 
is  therefore  called  a  "balance  sheet/* 

The  foUowing  two  balance  sheets  iUustrate  the  accumula- 
tion  ma  year  of  that  part  of  capital  which  bookkeepers  seoa- 
rate  from  the  "  capital "  item  and  caU  "  surplus." 

JANUARY  1,  1010 

LiAnums 

 1800.000    Debts   |ioo.eoo 

Capital  (owed  to  the 

  stockhoWen)    .  .  loo^ 

tvmjmo  $wo.ooo 

JANUARY  1,  1911 

^■■■w  LiABiums 

Plsat^alc.  ....  $246434     Debts  fxoo,ooo 

Capital  ,00,000 

  Surplus   46,384 

$246^24 

Not  only  is  the  book  item,  «  capital,"  maintatr^cd  intact 
•8  long  as  possible,  but  often  the  surplus  also  is  put  in 
round  numbers  and  kept  at  the  same  figure  for  sevenU  succes- 
sive reports.  This  leads  bookkeepers  to  distinguish  a  third 
part  of  the  capital,  namely,  the  odd  sum  usuaUy  existing 
m  addition  to  the  surplus.  This  third  item  is  caUed  "  un- 
divided profits,"  and  is  subject  to  constant  fluctuatkm 
from  one  date  to  another.  The  distinction  between  sur- 
plus and  undivided  profits  is  thus  merely  one  of  degree 


CAflZAL 


49 


The  three  items  —  capital,  surplus,  and  undivided  pn^tt — 
together  make  19  the  total  capftat-baluice  due  the  stock- 
holders. Of  this,  "  capital "  represents  the  original  capi- 
tal, "surplus"  the  earlier  and  larger  accumulations,  and 
"  undivided  profits  "  the  later  and  minor  accumulations. 
The  undivided  profits  are  more  Ukdy  soon  to  disappear  in 
dividends,  ».«.,  to  become  divided  profits,  although  this  may 
also  happen  to  the  surplus,  or  even  in  certain  cases  to  the 
"  capital "  itself. 

We  see,  then,  that  the  capital  of  a  company,  firm,  or 
person,  is  to  be  understood  in  two  senses :  first,  as  the  item  en- 
tered in  the  balance  sheet  under  that  head — the  original  cap- 
ital; and  secondly,  this  sumplussurplusand  undivided  profits 
—  the  true  net  ca]ntal  at  the  instant  under  conaderation. 

In  the  case  of  a  joint  stock  company,  since  the  stock 
certificates  were  issued  at  the  time  of  the  formation  of  the 
company,  and  cannot  be  perpetually  changed,  they  01^ 
narifyonrapond  to  the  (wiginal  capital  instead  of  thepvesent 
capital.   Recapitalization  may  be  effected,  however,  by 
recalling  the  stock  certificates  and  issuing  new  ones.  In  this 
way  the  nominal  or  book  value  may  be  dther  decreased  or 
increased.  It  is  sometimes  scaled  down  because  of  shrinking 
assets,  and  sometimes  increased  because  of  new  subscrip- 
tions or  expanding  assets.   If,  for  instance,  the  original 
capital  was  $100,000,  and  the  present  capital  (including  th0 
surplus  and  undivided  profits)  is  $300,000,  it  would  be  pos- 
sible, in  order  that  the  total  certificates  outstanding  might 
become  $300,000,  and  the  surplus  and  undivided  profits  be 
enrolled  as  capital,  to  issue  additbnal  stod:  certificates  to 
the  amount  of  $300^  free  to  the  holders  of  the  original 
irtodc.  Such  an  issue  of  stock  is  called  a  stock  dividend. 
Ordinarily,  however,  the  stock  certificates  remain  as  origi- 
nally, and  merely  increase  in  value.  Thus,  if  the  present 
capital  is  #300,000,  tHwceas  the  original  capital  or  the  oat- 
standing  certificates  amounted  to  only  $100,000,  the 
market  value "  of  the  shares  wHl  be  triple  the  "  face 


44      naiaiwAEY  nmanMB  or  ioohqkics  Kmm,m 

value";  for  the  stockholdm  omi  a  totel  of  t»oo«» 
represented  by  artifide,  tto  to  ^  i  *K 

#Z0O|O0O. 

S  3.  Book  tad  Maitet  Vatatt 

in  the  results.  For  fastance,  a  certain  bank  of  New  Yo  A 
re^Uy  reported  .  total  c^rftd,  surplura^i  ^^^"^ 
profite  of  li,295.9Sa.59.  of  which  the  original  capitalw*. 

f?""  "^-'o^thaTThe  stS 

«rtffi(jtes,  the  total  face  value  of  which  was  feoot^ 

stodc  cerUficate  with  a  face  value  of  $,00  would  be  wSS 

^«  about  $7oa 
•^^a      *7oo  is  due  to  the  fact  Lt 
there  an  two  estfautes  of  the  value  of  capital-one  that 
ofthe  bookkeeper  which  is  seldom  remand 

c^trth?t:>t?'  stockhoUem  of  this  bank  were 
creaited  by  the  bookkeeper  with  ownwir  $1  20c  oca  cn 

^  S;  S'k^^'T''  «y«*«°>atically  under- 

S^!L2f  the  bank,  and  even  omitted  some  valu- 

»Meittsetsdtogeto,suchas"^  The  object  of  a 

^iS^  2!"^ fiff?^*'^'  but  to  make  so  conservative  a 
^^cv  ^h^iT^H^**^  requirements  of  the  law  and 
St^S  ^fY*»~"»*«»«««ti»evaluationofas8ets 
^ve  their  ongmal  cost;  and  sometimes  there  is  an  adcM- 
^mouve  to  undervalue,  -  the  wish  to  conceal  a 

from  fear  either  of  competition  or  of  taxaUon^ 
Of  the  two  valuations  of  the  capital  of  a  company  the 
bodckeeper's  and  the  market's,  the  latter,  being 
q^y  revised  is  apt  to  be  the  truer  of  the 
thoa^it  mint  be  remembered  that  each  of  them  is  mirdy 


41 


an  appraisement  The  ordinary  bookkeeper't  figures, 
which  have  to  imposing  an  appearaaee  of  •ocnncy,  tre, 
in  letlity,  and  oltoi  of  necessity,  very  wide  of  the  nuA, 
For  instance,  a  certain  bank  recently  reported  its  capital, 
surplus,  and  undivided  profits  at  $444,814.40,  but  at  the 
same  time  the  president  of  the  b«nk  boetted  thit  the  baiik- 
ii^  house  was  entered  among  the  anets  at  $30,000,  while 
its  real  value  was  probably  $50,000.  Thus  the  figure  giving 
the  capital,  surplus,  or  undivided  profits,  instead  of  being 
correct  to  the  last  cent  or  even  tke  last  dollar,  was  not 
correct  even  to  the  Ust  ten  thouaaad  dofiafs. 


i  4.  Case  of  Decreasing  Capital-balance 

We  have  seen  that  the  effect  upon  the  baUnce  sheet  of  an 
increase  in  the  value  of  the  assets  is  to  swell  the  surplus  or 
the  undivided  profits.  Conversely,  a  Hhrinkage  cl  vafaa 
tends  to  diminish  those  items.  For  instance,  if  tlw  plant  of 
a  company  having  a  capital  of  $100,000  and  a  surplus  of 
$50,000  depreciates  to  the  extent  of  $40,000,  the  dfoct 
<m  the  account  will  be  as  follows:  — 

ORIGINAL  BALANCE  SHEET 
Assets  Ijabiuhis 
FImA     ....  $300,0004)0    IM>ts    ....  9t§»fieom 
MhiiBininiii  .  .    iot,ssM>    Capital   ....  weofioMo 

Suzidus   ....  s^fiooM 
  .  UadMM  ptote  .  1,35643 

•|0MS(4<  $sM,tSMs 

PRESENT  BALANCE  SHEET 
AsRTS  Tiaaiimss 

Plant  ^te^.oo    Debts     ....  $150,000.00 

MHtrrf'fl-tm  .  .    m^sfi^    Capital   ....  100,000.00 

  VwSMiad  pwiti  1,35648 

$a6x,as64a  $061,35643 


"■■■"iiun  nmesui  or 


w^^,  '"^I"? "»"''"''«'  P™*"  both  beat 
««^,  but  not  often  fa  orfinao-  ba,in«,.  SZ  SZ 

Dfahonert  concerns,  however,  often  conced  their  true  o>n 

7^  tZn  "  '^T  •"""o^.  M  to  the  cue 

fcm^'^^    1*=°"""^  Th'sumsfatrustedtounscrUDu! 

.W^-P-y  in^oriTof  £  CS^i.l^'^n^ 

JfA^h^    '^'^^'^f^^^'*^'-   In  such  a  case  the  booS 
of  the  bubbte  concern  will  show  the  following  figum : - 

Asoxs 

|ioo,ooo  Debts 
  Capital 

llOOyOOO   

WMK9JOOO 

But  if  the  land  is  worth,  say,  only  f6o^  tlie>e 
should  have  been  quite  different, 

ASSITS  Yj^-  ^^^^ 

^ ^  150,000 


8k.  4] 


CARTAL 


47 


In  other  words,  the  investor  has  only  $xo,ooo  worth  oi 
property,  insteftd  of  the  $50,000  which  he  put  in,  or  ao  cents 
for  every  dolkr  invested.  Hie  rest  has  been  div«rted  into 
the  pocktU  ol  tlw  pmnotor  and  ol  Umm  fai  ooBiMiaB  wKk 

him. 

This  is  stock  jdi>bing.  It  is  oat  eiample  of  what,  in 
umunerdal  slang,  is  allied    stock  watering,"  being  an 
iwie  of  stock  whose  nominal  or  '-.Mi  vahie  is  greater  than  the 
actual  capital.   Another  and  more  usual  use  of  the  term 
"stock  watering  "  makes  it  mean  an  issue  of  stock  beymid 
the  origteal  Mil  vabe  of  the  capital  as  ihoim  by  the  actual 
money  paid  in,  whether  or  not  this  be  beyond  the  real 
commercial  capital-value.    Thus  a  "  trust "  may  buy  up 
a  number  of  fact  )ries  and  then  cajHtalize  them  far  b^nd 
that  coat,  beeaase  the  combination  of  the  iactoriea  gbia 
them  a  awnopoly  value  beyond  the  sum  of  their  values 
when  separate.   By  this  kind  of  stock  watering,  conceal- 
nent  is  made  (A  the  fact  that  the  trust  is  earning  an  enor- 
mous rate  oi  dividflnds  in  proportkm  to  the  original  ismik' 
ment;  for  L  e  dividends  make  a  mvi  h  t-maUer  rate  on  the 
inflated,  or  watered,  capitalization  thaii  «>   thft  cost  value. 
Stock  watering  is  usually  employed  t'>  ;  '  .  :<t  a  knowl- 
edge id  the  original  value  of  the  ixpiw,  'cr  instance,  to 
•void  pdUk  displeasure,  taxati(m,  or  legal  regulation  of 
the  rates  charged.    It  is  sometimes  said  that  there  is  no 
wrong  in  such  stock  watering,  so  long  as  it  is  fully  known. 
This  is  mndi  like  saying  that  to  He  b  not  wrong,  pro- 
vided everybody  knows  you  are  lying.     F'  cck  watering 
of  the  kind  described  is  the  exaggeraticm  of  M  "  capital " 
item  entered  on  the  liabilities  side  of  the  balance  sheet; 
and,  since  ^  two  akka  mart  bakoioe,  k  kmihraa 
eiaggeration  of  the  assets  also.   It  usually  represents  an 
intention  to  deceive,  and  through  this  deceit  injury  may 
be  done  both  to  buyers  of  stock  and  buyers  of  bu  ^ds. 
T%e  buyers  of  itock  an  k#fed  if  their  bnjr  witlmtt  lomri- 
edie  of  tie  pnpoiii  Hock  nalHiii^  aad      bend  ki9« 


fa  injured  if  the  watering  of  the  stock,  havinir  riven  him  « 
faJse  Idea  of  the  actual  capital.  inducesS^to 
money  than  the  capital  can  satkctoiTy^.  ^ 

i  S-  Insolvency 

cJt^^  if^i^"'  »  •»  either  increased 

(other  than  the  capital  liability  iLu)  ^"^ 

of  gua^nteeingXe  vaO.i'e^^^^'^  ~ 
fcoodholders  and  other  creditors  ™o«e  to 

The  amount  of  capital-balance  necessarv  u  • 

reasonably  «fb^  differ  ^^^S^L^j?  ^ 
tal-balance  equal  to  five  ner  n«>  ^.CT?^!^'  "f"" 

'^^^^^^  fifty  per  c^J^ 

T^Jr'-. '''''''  dependL^hr^lCJ 
are  to  shnnk,  and  to  what  extent;  and  much 

•nnak  bdowthehrfrflities--to  otheit  than  .tockholdeii 


8k;  si 


4f 


This  risk  is  the  greater,  the  more  ithrinlraWr  the  Mieti, 
and  the  leas  the  marghi  of  capital-vafaie  between  Mtett  and 

liabilities. 

Insolvency  must  be  distinguished  from  insufficiency  of 
cash.  The  assets  may  comfortably  exceed  the  KahiKtiea, 
and  yet  the  cash  assets  at  a  particular  mmnent  may  be  less 
than  the  cash  liabilities  due  at  that  moment.  This  condi- 
tion is  not  true  insolvency,  but  only  insufficiency  of  cash. 
In  such  a  case,  a  little  forbearance  on  the  part  of  creditiws 
may  be  all  that  is  necessary  to  i»civeat  finaadal  sli^ 
wreck. 

A  wise  merchant,  however,  will  not  only  avoid  insolvency, 
but  also  insufficiency  of  cash.  He  will  not  only  keep  his  Uh 
sets  in  excess  of  his  Bafaflities  by  a  safe  margin,  but  he  vffl 
also  see  that  his  assets  are  invested  in  such  a  manner  that 
he  shall  be  able,  by  exchanging  them  for  cash,  to  canjd 
each  claim  at  the  time  and  in  the  manner  agreed  uptm. 

Tram  this  point  of  view  there  are  three  chief  Usata  of 
assets ;  namely,  cash  assets,  quick  assets,  and  slow  assets.  A 
cash  asset  is  in  actual  money,  or  what  is  acceptable  in  place 
oi  money.  A  quick  asset  is  one  which  may  be  exchanged  for 
cash  in  a  rdativdy  short  time,  as,  Ux  instance,  goUi  or  sihnr 
bullion,  wheat,  short-time  loans,  and  other  marketable  se- 
curities. A  slow  asset  is  one  which  may  require  a  relativdy 
long  time  to  be  exchanged  for  cash.  Such  are  real  estate, 
office  fixtures,  and  manxifacturars'  equifMnent. 

If  all  property  were  as  acceptable  as  money,  there  would 
be  no  need  of  classifying  assets  into  these  three  groups. 
But  since  the  creditor  will  not  accept  railway  stock  or  bonds, 
wtoi  he  has  coi^nctsd  for  payment  in  money,  the  dablor 
must  maneuver  so  as  to  keep  on  hand  a  sufficient  quantity 
of  cash  assets  to  enable  him  to  meet  his  immediate  obli- 
gations and  enough  quick  assets  to  enable  him  to  exdiange 
them  for  cash  in  time  to  meet  oUigatioos  soon  to  fall  due. 
A  lai^e  pMt  <rf  Ae  skill  of  a  business  man  consists  in  marshal- 
ing his  assets  so  that  he  always  has  enough  cash  and  enough 


so      sEBfKMTASY  FiiNanBs  ow  icoMoiiia  f^rf  m 

quick  assets  to  provide  lor  knpeiidiiig  debts,  while  maintain- 
at  the  same  time  enough  slow  aneCs  to  insure  a  Tttfs- 

factory  income  from  his  business. 

(Mifa^,  befeR  bnsmess  was  separated  from  private  life 
all  of  a  debtor's  assets,  even  indudiiig  his  own  person,  wen! 
redded  as  pledged  to  the  payment  of  a  debt.  An  insolvent 
deb^could  be  impriwned.  To^ay.  however,  laws  exist 
m  Ml  ooimtries  by  which  a  bankrupt  may,  under  certain 
conditions,  be  discharged,  free  from  further  Bsbility 

Since  the  liabilities  of  one  man  are  also  the  asUts  of 
another,  when  one  man  fails  and  is  able  to  pay  only  fifty 
cents  on  a«  doHar,  the  unlucky  man  who  is  his  creditor 
who  has  the  first  man's  notes  as  assets —suffers  a  shiinkase 
m  his  own  assets  which  may  in  turn  mean  embarrasraSt 
^l^r^^^y^^P^cy^^.  It  is  usually  true  in  a  panic  that 
thefiutares  start  with  the  collapse  of  some  big  firWhivolv- 
ing  a  shrinkage  in  the  assets  of  others.  This  incycates  whv 
assets  ought  usuaUy  to  be  undervalued.  A  man  who  is  in 
debt  has  no  right  to  exaggerate  his  means  of  payment  A 
conservative  and  honest  business  man  will  always  under- 
value rather  than  overvahie  his  assrts,  In  oider  to  be  fair  to 
nia  creditors. 

fi  6.  Real  and  Fictitious  Penona 

It  is  well  to  note  here  the  distinction  between  the  accouBl. 
mg  olreal  persons  and    fictitious  persons.   For  a  real  per- 

H«bffities,  and  the  difference  Is  the  capital-balance  of  that 
person.  This  capital  is  not,  in  the  case  of  real  peraena. 
to  be  regarded  as  a  liability,  but  as  a  balance  or  dSfo^oe 
oetween  the  UabiliUes  and  the  assets.  For  a  fictitious 
^"^J"  '  '  .V~'P«»'*«'  P*rtnefBWp,  association,  etc., 
regarded  as  mdependent  of  the  real  persons  camprisfai^ 
It),  on jhe  oUier  hand,  the  liabilities  are  ahra^^ 
afMtf  to  the  assets;  for  Uie  balancing  item  inHfd  eapui 


is  as  truly  an  obligation  (from  the  fictitious  person  to  the 
real  stockholders)  as  any  of  tihe  other  liafaiMtiw.  For 

instance,  the  items  entered  as  "  capital,"  "  surplus,"  and 
"  undivided  profits  "  in  the  accounts  of  a  joint  stock  company 
do  not  belong  to  the  company,  as  such,  but  to  the  stock- 
holders. So  fur  as  tiie  company  "  is  concerned,  they  we 
its  liabilities;  they  represent  what  it  owes  to  the  stockholders, 
just  as  truly  as  the  other  items  of  liabilities  represent  what 
it  owes  to  the  bondholders,  etc.  A  fictitious  person,  in  fact, 
is  a  mere  imaginary  being,  hdding  certdbi  aaMto  and  owing 
all  of  them  out  again  to  real  persons,  including  the  stock- 
holders. A  joint  stock  company  may,  it  is  true,  be  re- 
garded as  consisting  of  real  persons  (stockholders,  etc). 
But  if  we  prefer,  it  may  be  regarded  as  a  Mpanle  en^. 
In  this  case,  of  course,  the  "  company  "  becomes  a  mere 
bookkeeping  dummy  having  no  capital-balance  of  its  o«m 
and  apart  from  what  it  owes  the  stockholders. 


|y.  Two  Me<tode  ef 

We  have  seen  how  the  caiutal  account  of  each  perstm  in  a 
community  is  formed.  Our  next  tsA  is  to  tipiew  tetetd 
net  capital  of  any  community.  This  is  the  sum  of  the  net 
capitals  of  its  members,  i.e.,  all  the  innimierable  assets  of  all 
the  persons  less  all  the  liabilities  of  those  persons.  This  net 
turn  will  be  the  same,  of  course,  in  whatever  ofder  tiie  tewi 
are  added  and  subtracted.  We  might  write  each  item  on  ft 
slip  of  paper,  marking  each  asset  itan  as  positive  and  each 
liability  item  as  negative,  and,  shuflBing  them  into  any  ran- 
dom order,  add  andsttbtraet  Iton  one  by  oMaoeoidfng  n 
they  are  positive  or  n^ative.  But  thete  we  IMO  tnfW  ift 
particular  which  need  to  be  emphasized. 

The  dnq)lest  is,  first,  to  obtain  the  net  capital-balance  of 
each  perscm  by  aubtractu^  ihe  value  4i  hfe  ^MMi&m  bam 
that  of  his  andthgp  to  a«ld  together  these  net  capites 
ef  Jiffeimt  pamm  t»  ^       capital  of  sodety.  This 

UlBRARY  OF  THE  JNlVtBSlTY  \ 


5«       suMsimKY  mcaus  or  boonomics  ichap.  ui 

method  of  obtaining  society's  net  capital  maybe  caUed  the 
mrtfod  ^balances;  for  we  balance  the  books  of  each  indi- 
VKbial  The  other  method  i.  to  ctncdeadiliabiUty  against 
an  equal  and  opposite  asset,  which  equal  and  opuMite 
asset  as  we  shaU  see,  must  exist  somewhere  in  Mother 
ffl^dnaJs  accomit,  and  then  add  the  remaining  assets. 
This  method  may  be  caUed  the  meOod  of  couples;  for  we 
coup  e  Items  m  two  difiFerent  accounts.  The  metliod  of 
couples  IS  based  on  the  fact  that  every  liability  item  in  a 
balance  sheet  implies  the  existence  of  an  equal  asset  in 
some  other  bahace  sheet.  fWs  is  true  because  every 
debit  imphes  a  credit.   A  debt  may  be  owed  to  somebody 

^''^  somebody,  a  debtor,  and  tte 
debt  of  the  debtor  is  the  credit  of  the  oecfitor.  It  follows 
that  every  msitive  tem  in  eK  bdnce  sheet  may  be  can- 
celed  agamst  a  corresponding  positive  turn  is  fltme  ite 
Each  of  these  two  methods— of  trilMnn  mmi  ai  amu^J. 
k  inportMit  in  its  own  way. 

fflugrate  each  by  tiie  fcahtto  sheets  of  three  r«d 


PERSON  X 

LlABIIXriES 

: : : :  ^^z"  ^-  ♦««»»♦ 

Railroad  ahaNB  .   .  aofioo 


X'lmortg^  .  .   .$50,000^    D*ttoZ  ....  Sjrjrotf 

Personal  effects  .  .  20,000  "W^** 
Railroad  diares   .    .  10,000 


8K-7) 


CAPITAL 


IS 


FBRSCW  Z 

T.TABlUTUt 

Vtdebt  .  .  .  140,000c  Debt  to  X  .  .  .  $30,000 « 
Akm   .   •   •   •  Sfifico 

Saibawl  bosds  .  ao,ooo   

$110,000  $30^000 
Ci^t>l*b>hiii08  $80,000 

As  the  persons  are  real,  not  fictitious,  the  "  capital "  is 
in  this  case  not  a  true  liability,  but  is  the  tsem  fd  tht 
total  assets  over  the  total  liabilities.  The  sum  of  these 
capital-balances  is  the  total  net  capital  of  X,  Y,  and  Z,  and 
is  thus  obtained  by  the  method  of  balances.  To  show  the 
mrthod  d  ooiqdes  in  the  table,  each  couple  of  onresponding 
JtaBH— each  item  which  appears  twice,  once  as  a  liability 
(A  one  man  and  again  as  an  asset  of  another  —  is  indicated 
in  both  places  by  the  same  letter.  Thus,  "A"  in  X's 
assets  is  matdied  by  tht  equal  and  opposite  item  "  a  in 
Z's  liabilities.  The  method  of  couples  thus  consists  in 
canceling,  and,  therefore,  omitting  from  society's  balance 
sheet,  these  pairs  of  items,  and  enterii^  and  adding  only 
those  which  remam  mcmeM.  These,  li  the  present 
cue,  are  all  assets.  Adding  these,  we  again  obtain  a  sum 
npRsenting  the  total  net  capital  of  X,  Y,  and  Z,  this  time 
the  method  of  couples. 

TW  fMults  of  iHMiMnini;  up  the  capital  tgcottate  by  tht 
two  Ihodi  am  Aom  in  Hm  iolkmlag  Hite:-' 


tOfiOO 

30,000 

ao,oQO 


X^«mlHi    ....  $70ywe    Roldeace .  . 
Vs  capital    ...        4o>ooo    PenKMoi  cfscts 
Z'«  capital    ....    10,000    Farm    .   .  . 

Railroad 


$igo,oo» 

tolali  ate  tM  same  by  both  methods,  but  the  ssethod 
tt»  Ave  of  «te       c^jitai  wllA  it 


5« 


OF  ECONOMICS    [Cbat.  Ill 


oi|ntted  by  each  individual,  while  the  method  of  couplci  ex- 
WWts  the  portion  ascribable  to  each  different  capital-food. 

18.  UltfaBilt  RMott  of  MMM  of  CooplM 

Let  us  now  introduce  into  our  additioii  the  capital  ac- 
counts of  the  railroad  whose  stocks  and  bonds  were  included 
amoDg  Uie  assets  of  persons  X,  Y,  and  Z.  For  simpUdty. 
we  ahaU  suppose  that  these  three  persons  are  the  only 
persons  mterested  in  the  road.  Hm  balaaoe  iheet  of  the 
railroad  conqjwy  wffl  accoidingly  as  tolfcm: 

RAILROAD  OOMPANY 


-  -  LUBIUHZS 

 ♦so.ooo    Bonds  (hdd  by  Z)  .  .  $aofiOO 

Capital  stock 

(held  by  X)  $ao,ooo 

  (bdd  by  Y)  lio/xjo  30,000 

«  .  .  lso,ooo  JsoMo 
CapiUMMJMceof  theR.R.Caitidftoo^ 

If  now  by  the  method  o{  baknces,  we  condiine  this  balance 
sheet  with  those  of  X,  Y,  and  Z,  we  shall  see  that  its  inclu- 
sion  does  not  affect  the  results  which  were  obtained  by  the 
sjme  method  before  the  railroad  was  introduced  into  the 
ffiKuaikm.  The  totebwffl  stand  Miofloim:  — 

X's  capital-balance .  .  .  .  ft»a.Mk 
Y's  capital-bdaace  [  ]  •JTZ: 

WI««IC^%Ciptol.byMice  .  .  .  :  oogS 

$190,000 

♦  JtSI""^^^^  °^  *=°"P^^'  however, 

tliat  tbe  indiiwm  in  our  considmtion  of  the  raflway 
company  s  capital  account  wiU  affect  the  items,  tinarii  lu^ 
the  final  sum.   The  stocks  and  bonds,  as  assets  of  X,  Y 

^  ^°"P'«        the  corresponding 

haMktiwef  ^  r^ko^  company,  and  their  place  wiii  be 


8k.  81 


CtfffAL 


SS 


Msnoo  01  Cotmss 
Reatdeoce  f70i< 


Farm  SOi 

RaUway  __S2i 


19^  appearance  of  the  o^ital  inveiitory  Is  thw  rhuignd. 
f^imiill  the  ^ms  of  property  rights  in  it  included  such 
^ar^rights  as  stocks  and  bonds ;  now  they  consist  only  of 
comfkte  property  rights.  But  the  complete  right  to  any 
artide  of  weaHfc  ia  beat  upiewtd  in  tena»  of  the  Mtiiii  <l 
wealth  itaetf.  Consequently,  instead  of  the  long  phrase, 
the  "  right  to  A  residence,"  we  may  merely  use  the  term 
•*  residence."  The  property  no  k>n^  veils  the  weaith  fa** 
neathit;  and  liie  inveikory,  wUdi  bcfote  was  Ml isiMiHir 
«|  capital  wealth  and  capitid  prvpmty  h&mmmm  i» 
ventory  of  only  capital  wealth. 

Such  a  result  is  sure  to  foUow  when  we  canlMne  capkal 
acowB^  provided  we  iiwiMnf  eaoi^  «l  to  sopf^i 
lor  M^Eal^y  item,  Us  ownterpart  asset,  and  for  every 
asset  •aidck  has  one,  its  counterpart  liability.  Thaie  SMets 
which  have  no  counteifiarts  are  what  we  have  caUed  the 
comtktt  rights  to  werfA;  i»i«e  thoae  nwls  «fkf*  ^ 
^mm  CHMfeg  couatetparts  are  the  paftial  rights  to  wealth. 
The  reason  is  that  partial  rights  to  wealth  necessarily 
have  canceling  counterpwts  in  that  whenever  any  pmrtid 
owMT^:^  of  a  given  aftfdi  al  w&iA  is  IbM  If  a 
dar  panan,  its  whoiU  ammeUkip  must  be  supposed  to  be 
heW  by  some  fictitious  person  even  if  specially  created  for 
the  {Hirpose.  Ttos,  if  a  fMm&tr  named  Smith  owns  an  un- 
divMad  half  atcnst  in  a  tmm  jointly  owned  by  Maaltf 
anA  iHliMF,  no  BMiraiirr  «f  ^  vtoie  fam  as  ownei 
^iditfana  person,  the  partnerri^,  known  as  the  "  Snrfth 
biothefa."   The  owner  of  the  half  interest, "  }oim  9mkk 


n 


ihutt  R#I4°  A  ciaoa  agsunCt  tiba  BaftHf Mtte  **  ftrft^  Itap^^ 


50      blbumtaby  nmcmit  ot  iconoiiics  Ka».m 

partmrsldp.  It  b  dear  that  an  individual  cannot  own  a 
part  interest  in  ;uiy  given  wealth  without  its  being  true 
that  the  fictitious  owner  of  it  aU  is  Uable  to  him  to  that 
extent.  Therefore  every  partial  right  to  wealth,  while  an 
Mset  to  the  owner  of  that  right,  is  a  liability  to  the  ficti- 
tious person  owning  the  whole.  Every  article  of  concrete 
wealth  has  to  be  regarded  as  owned  by  some  one,  even  if 
we  have  to  set  up  a  fictitious  person  or  dvaamy  for  that 
very  purpose. 

To  foUow  out  totals  of  capital  thus  requires  the  indusion 

of  many  fictitious  persons,  for  it  is  often  only  the  fictitious 
persons  who  hold  the  complete  rights.  Locomotives  and 
railway  stations,  for  instance,  are  owned  by  corporations, 
not  individuab.  In  fact,  these  fictitious  persons —partneiw 
ships,  corporations,  trusts,  munidpalities,  assodations,  and 
the  like  —  are  devices  for  the  express  purpose  of  holdmg 
large  aggregations  of  concrete  wealth  and  parceling  out  iU 
ownership  among  a  number  oil  real  peiMms. 

If,  then,  we  suppose  balance  sheets  so  constructed  as  to 
indude  all  the  real  and  fictitious  persons  in  the  world,  with 
entries  m  them  for  every  asset  and  liability,  —  even  public 

paiis  and  streets,  hoosdioid  furniture,  and  other  poesessloDS 

not  formally  accounted  for  in  ordinary  practice, — it  b  evi- 
dent that  we  shall  obtain,  by  the  method  of  balances,  a 
complete  account  of  the  distribution  of  capital-value  among 
real  persons;  and,  by  the  method  of  couples,  a  complete 
list  of  the  artides  of  actual  wealth  thus  owned.  In  this  Ust 
there  will  be  no  stocks,  bonds,  mortgages,  notes,  or  other 
part-rights,  but  only  land,  buildings,  and  other  land  improve- 
ments, and  commodities.  All  debit  and  credit  items  being 
two  faced  —  positive  and  negative  —  caned  out  in  the  total. 
This  self-effacement,  however,  does  not  mean  that  the  total 
wouM  be  just  the  same  if  there  were  no  stocks,  bonds, 
■■or^ges,  notes,  or  other  two-faced  items.  On  the  con- 
teary,  the  existence  of  such  property  rights  indirectly  adds 
a  piat  deal  to  the  effectiveness  of  iwilth    Thy  aaka 


8k.  4 


CARXAL 


$7 


possible  the  cooperative  ownership  of  great  aggregations 
of  capital  which  without  such  ownership  could  scarcdy 
cadit,  and  thus  result  in  increaaiiig  ftwtfy  the  total  bane- 
its  we  enjoy  from  capitaL 

§  9.  Confusions  to  be  Avoided 

Among  the  forms  of  part-rights  in  real  wealth  is  "credit." 
Credit  is  simply  a  debt  looked  at  from  the  standpoint  of  the 
creditor.  There  has  been  mudi  discussion  as  to  the  nature 
of  credit  It  has  been  sometimes  regarded  as  an  item  of 
wealth;  and  an  increase  or  inflation  of  credit  has  been 
looked  on  as  a  real  addition  to  the  wealth  of  the  commu- 
nity. But,  of  course,  since  every  credit  is  abo  a  debit,  it 
cannot  be  regaided  at  a  simple  additicm  to  the  wealth 
of  the  community  as  a  whole.  The  phenomenon  of 
credit  means  nothing  more  nor  less  than  a  q)ecific  form  of 
divided  ownersh^  of  wealth.  Credit  mercfy  enabka  one 
Bian  temfKHrarily  to  control  more  wealth  or  {xt^rty  than  he 
ffwns  —  i.e.,  some  part  of  the  wealth  or  property  of  others. 

It  u,  therefore,  a  cardinal  error  to  regard  credit  as  increas- 
ing the  capital  (rf  the  dthtor.  Lkiirectly,  ct  course,  credit 
may  muU  in  an  increase  of  society's  capital,  by  stimulating 
trade  and  production,  as  well  as  by  getting  the  management 
of  cental  into  the  right  hands  and  its  ownershq)  into  the  most 
effective  fonn.  In  these  ways  the  earth  is  made  to  yield  up 
more  wealth,  or  greater  benefits  from  the  same  wealth — in 
either  case  entailing  an  increase  of  capital ;  but  the  amount 
of  any  such  increase  of  capital  thus  indirectly  produced  bears 
no  necessary  rdation  to  the  amount  oi  tiw  credit  wiskk 
facilitated  its  production.  Even  when  capital  is  increased 
through  credit,  the  credit  does  not  constitute  the  increase. 

A  great  deal  of  confusion  in  iegiidation  and  discussion  could 
be  avoided  if  the  two  methods  of  combining  capital  acoeunte 
were  distingu^^d  and  their  interrelations  rccogm^.  In 
taTSti^HT^  the  two  Riethods  are  cdtm  oanlused.  An  impoiv 


SS      niifiMXAKy  niNcsui  ov  ffrniifiMWi  {Qm».iii 

taBtpfobhmof  dfidarttttfttfonoi  property  is  how  to  svoid 

unintentional  double  taxation  and  at  the  same  time  not  to 
allow  some  property  unintentionally  to  escape  any  taxa- 
tion. There  are  two  solutions.  One  is  to  tax  the  amount 
owned  by  eadi  real  penoa  m  obtitei  by  the  method 
of  balances;  this  method  seeks  out  the  real  owmsrs  or 
part-owners  of  wealth.  The  other  is  to  tax  the  actual 
concrete  wealth  as  obtained  by  the  method  of  couples; 
thb  method  seeks  out  the  letl  wealtk  owned.  In  short, 
one  method  follows  the  person,  the  other  the  thing.  At 
present  the  two  methods  are  much  confused.  Legislators 
too  often  fail  to  perceive  that  under  the  first,  or  owner- 
method,  coipmtimis  shoukl  not  be  tssed,  for  they  are  not 
true  owners ;  and  that  under  the  second,  or  wealth-method, 
bonds,  stocks,  and  other  part-rights  to  wealth  should  not 
be  taxed,  for  these  are  ahready  taxed  when  the  actual  rail- 
ways and  other  itcau  of  physical  wealth  underlying  such 
part-rights  are  taxed.  It  is  not  claimed,  of  course,  that  a 
complete  system  of  taxation  can  be  worked  out  merely  by 
choming  one  of  the  two  methods  just  indicated.  But  the 
distinctkm  between  the  two  should  be  borne  in  mind,  when- 
ever any  scheme  of  taxation  is  Considered;  for  where  one 
system  is  applied,  the  other  cannot  also  be  applied  without 
double  taxation. 

The  study  of  capital  accounting,  therefore,  enables 
us  to  avoid  many  common  confusions.  More  important 
still,  it  gives  us  a  dear  picture  of  the  relations  between  the 
capital  of  a  community  and  the  capital  of  the  individuals 
of  which  the  community  is  (imposed,  «.«.,  between  the 
stocks  of  actual  wealth  in  a  community  and  the  sto(^  of 
property  representing  the  ownership  of  this  wealth  among 
diffoent  individuals.  In  short,  it  enables  us  to  see  both 
individually  and  as  a  whole  the  items  which  make  up  private 
and  collective  property,  as  stocks,  bonds,  mortgages,  debts, 
etc.,  on  the  one  hand,  and  land,  ships,  dwdllxif^  aod  other 
concrete  wealth,  on  the  other. 


•k.«I 


CATBAL 


99 


la  the  U^t  of  the  ioi«gaii«  pfinc^  1M     fa  »  porfto 

to  take  a  bird's-eye  view  of  the  capital  in  any  country.  In 
America,  for  instence,  we  find  a  stock  of  wealth  of  various 
kinds  with  an  estimated  value  of  over  $100,000,000,000. 
Mon  than  half  of  tUt  ooniisto  of  real  estate;  about  ten 
per  cent  consists  of  raflways  and  their  equipment ;  manu- 
factured products  make  up  about  |8,ooo,ooo,ooo ;  furniture, 
carriages,  and  kindred  articles  about  $6,000,000,000;  Ihre 
ilod^  on  fanns  about  $4,000,000,000;  toole,  faqilements, 
and  muMuery  in  factories  about  $3,000,000,000;  clothing 
and  personal  adornments  about  $3,500,000,000;  street 
railways  about  $2,000,000,000 ;  agricultural  products  abottt 
gold  and  silver  coin  and  bullion  about 
$3,000,000,000 ;  and  there  are  anmerous  other  smaller  items. 
The  ownership  of  this  real  wealth  is  divided  up  in  various 
ways.  To  a  very  large  extent,  especially  in  the  case  oiiunm, 
the  leal  estate  is  owned  con^letely  by  the  occupier.  In  other 
cases  it  is  mortgaged,  the  occupier  then  owning  merely  the 
excess  of  value  over  the  mortgage.   Of  the  national  capital 
apart  from  real  estate,  on  the  other  hand,  probably  by  far 
tiie  greater  part  h  owned  by  corporations,  which  neens,  of 
course,  sunply  that  its  ownership  is  parceled  out  anumg  the 
stockholders  and  bondholders  of  these  corporations.  From 
what  has  been  said  the  student  will  not  make  the  ndslake 
of  •^"g  the  value  ot  stocks  and  bonds  to  the  value  of 
the  tangible  wealth  which  these  represent.   Stocks,  bonds, 
mortgages,  and  other  items  which  are  assets  to  some  persons 
are  liabilities  to  others,  and  thus  cancel  themselves  out  for 
the  country  as  a  whde.  The  student  will  also  notice  how 
insignificant  is  the  stock  of  gold  and  silver  as  compared  with 
the  total  capital,  although  the  value  of  all  is  measured  in 
terms  of  gdd. 


CHAPTER  IV 
mooiB 

I  ».  CooMpte  of  Income  and  Outgo 

Ttafaomc  from  any  particular  article  of  wealth  has  been 
defined  as  the  flow  of  benefits  bom  that  article  Th^,^ 
fits  may  sometimes  consist  of  money  payments  Wft  fa 
^rt^t  to  avoid  the  mistaken  noKaT  V  " 
wnsBtof  money  payments.  Income  is  tiie  flow  of 
benefits  accrue  from  any  artide  wWw 

happen  to  .«i„theforr^r^;»;S^„tr 

essence  of  income -from  the  ,ann.  Artidrnffl^JZ 
jrater ;  the  puiMng  is  the  benefit  or  incom^TSS 

rngBthemcomefromthedenki.  A  wife  does  1^,^^. 
J  '      ?  "T  °'  "come,  fcj"r«.' 

are  income.  The  warmth  and  shelter  that  a  house  pnS 

ioU  fumi^TS 

nouse.  AU  the  operations  of  industry  and  aU  the  tr/nm^Z 

tions  of  commerce  are  items  of^r^ 

trees  and  sawmills  turn  Uiem  into  lumber  the^XiS 

constitute  items  in  the  income  flowing  from  2^ 

which  produce  them.   When  a  manufacturing  1^1^^^ 

verts  raw  mateiuU  into  food  or  into  fkWo^  ^TL^ 


Sae.ll 


mooMt 


6t 


ments,  these  changes  constitute  income  produced  by  the 
fdant.  What  we  call  agriculture,  mining,  commerce,  and 
domestic  operations  constitute  large  and  important  daises 
of  income. 

Practically,  of  course,  most  of  the  examples  given  of  bene- 
fits or  services  are  not  income  to  the  owner  of  the  instru- 
ments rendering  those  services;  for,  i^actically,  those 
services  are  not  enjoyed  by  the  owner,  but  are  sold  to  some 
one  else,  the  owner  receiving  a  money  payment  instead. 
Thus,  althou^  a  farmer  may  get  his  living  directly  from  the 
farm,  it  is  more  \isual  f<»  him  to  sdl  some  <rf  the  farm  products 
and  to  receive  money  payments  instead.  Likewise  it  may 
be  that  the  owner  of  the  windmill  pumps  water  for  others 
and  receives  money  payments  in  return;  and  thaLf^^ 
owner  of  a  house  sdb  its  use  for  a  money  lentaL  ^ItA' 
larly  the  owners  of  the  derrick,  axes,  sawmill,  manufacturing 
plant,  etc.,  do  not  get  the  direct  benefit  of  the  hobting, 
cutting,  sawing,  manufacturing,  etc.,  but  exchange  these  for 
money  payments.  In  such  cases  the  owners  get  their  iii- 
come  in  the  form  of  money  payments  by  selling  to  others 
the  direct  benefits  of  their  capital.  Thus  their  capital  yields 
them  an  indirect  money  income  through  the  sale  of  the  direct 
income  produced  by  the  capital  So  usual  is  it  for  the  owner 
of  capital  to  -sell  his  direct  or  natural  income  for  a  money 
income  that  ordinarily  we  think  of  income  as  consisting  only 
of  such  money  return.  One  of  the  early  economists  seri- 
ously mainta&ed  that  tlw  owuct  of  a  house  could  rec^ 
no  income  from  it  except  by  renting  it,  forgetting  that  to 
let  a  house  is  merely  to  sell  the  shelter  income  for  money 
income.  A  man  who  lives  in  his  own  house  gets  the  shelter 
income  directly.  A  man  who  lets  his  house  to  Mother 
gecures  a  money  income  as  the  equivtknt  of  the  dieHer  te* 
come  which  he  sells  to  the  tenant. 

Income,  bang  a  flow  of  benefits,  implies  a  stock  or  fund 
whidi  i»rodttca  the  torn.  TMi  stodt  m  fu»l  any  con^ 
ptrtfy  of  imtnuxMnts  of  external  wealth,  which  we  Inve 


6a      umBRAKY  nmcmis  or  iconoiiics  (c»».  iv 

designated  as  capital  (in  the  narrow  sense),  and  parUy  of 
the  pofralatkm  itseif,  which  is  also  capital  (in  the  broader 
sense). 

It  has  already  been  noted  that  income  differs  from  capital 
in  two  respects.  In  the  first  place,  income  is  a  flow  relating 
to  a  given  period,  whereas  capital  is  a  stock  or  fund  relating 
to  a  given  instant.  In  the  second  place,  income  consists  of 
(mtangible)  benefits,  whereas  capital  consists  of  (tangible) 
instruments;  not  farms,  therefore,  nor  houses,  nor  food,  nor 
railroads,  nor  artesian  wdls,  nor  instruments  of  any  sort  can, 
stnctly  speaking,  ever  constitute  income.  Inoome  consists 
rather  in  the  yielding  of  crops  by  the  farms;  the  warming 
and  sheUmng  of  people  by  the  houses;  the  nourishing  of 
peofde  by  the  food;  the  transporting  of  passengers  and 
freight  by  the  railroads ;  the  raising  of  water  by  the  weOs; 
and  benef  ts  of  any  sort  rendered  by  instruments  of  wealth! 

Although  income  consists  partly  of  other  benefits  than 
nwney  receipts,  aU  income,like  aU  capital,  may  be  translated 
mto  terms  of  money.  For,  as  was  pointed  out  in  chapter 
II,  §  I,  to  aU  items  of  income,  i.e.,  benefits,  may  be  applied 
the  concepts  of  price  and  value. 

Ihconae,  as  well  as  capital,  is  subject  to  accounting. 
Tnus  far  we  have  considered  only  sudi  item  as  wotdd 
belong  to  the  positive  side  of  income  accounts.  But  just 
as  in  our  capital  account  we  found  a  negative  side  —  com- 
prising the  KaWKties  — so  we  shaU  find  a  negative  side 
to  mcome.  The  negative  of  income  is  called  outgo,  and 
the  items  which  constitute  outgo  are  called  costs.  A  cost 
occasioned  by  an  article  has  aheady  been  defined  as  the 
opposite  of  a  ben^t.  It  is  an  undesirable  event  occa- 
sioned by  that  article.  Labor,  trouble,  expense,  and  sacri- 
fices of  aU  sorts  are  entailed  by  wealth  and  are  counted 
among  its  costs.  An  instrument  seldom  confers  benefits 
without  also  involving  costs.  A  dwelling,  while  it  gives 
shelter,  compels  its  owner  to  assume  important  costs  b 
keeping  it  in  tepdt,  painting  it,  cleaning  it,  caOag  fat  it, 


Sic.  i] 


INCOME  63 


insuring  it,  and  paying  taxes  upon  it.  A  saddle  horse  yidds 
income  to  the  owner  when  it  gives  him  a  pleasure  ^e.  but 
it  requires  feeding,  stabling,  and  shoemg  —  the  negative  dde 
of  the  account,  constituting  the  outgo  or  flow  of  costs  oc- 
casioned by  the  horse.  A  farm  produces  benefits  in  yieldmg 
crops;  but  it  requires  fertilizing,  tilling,  and  seeding,  aU  of 
which  are  costs  occasioned  by  the  farm.  A  raiboad  pro- 
duces benefits  called  "  transportation"  —hauling  passengers 
and  commodities ;  but  it  involves  an  expenditure  of  money, 
it  bums  coal,  it  requires  labor ;  and  these  are  the  outgo,  or 
the  negative  side  of  its  account. 

Costs,  too,  may  be  measured  in  money  just  as  mcome  may 
be  measured  in  money  ;  and  some  costs,  whether  of  dwel- 
lings, farms,  railways,  or  other  articles,  consist  in  the  actiwl 
expenditure  of  money,  just  as  some  benefits  consfat  in  the 
receipf  ol  money.  Strictly  speaking,  neither  consists  of  actual 
r^'mey.  We  must,  therefore,  distinguish  carefully  three 
mooey  Items:  (1)  money  on  hand  at  an  instant  of  time, 
which  is  an  example  of  capital;  (2)  the  reedtt  of  money 
during  a  period  <rf  time,  iriiiA  is  an  example  of  income  (from 
whatever  instrument  occasions  the  receipt  of  the  money) ; 
and  (3)  the  expendUure  of  money  during  a  period  of  time, 
which  is  an  example  of  outgo  (on  the  part  of  whatever  instro- 
ment  occasimn  Uie  eqienae). 

In  general,  the  costs  of  a  given  item  of  capital  are  out- 
weighed by  its  benefits.  For  if  it  should  occasion  more 
costs  than  benefits,  it  would  be  thrown  away,  thereupon 
ceasing  to  be  wealth  according  to  our  definition.  Or  if  it 
should  still  remain  in  any  one's  possession,  it  might  be  called 
negative  wealtii,  of  which  ashes,  rubbish,  garbage,  etc.,  are 
familiar  examples.  *  . 

Costs,  then,  are  never  vohmtarily  assumed  except  m  the 
hope  of  benefits  which  will  make  tiiem  wortii  while.  The 
total  value  of  all  the  benefits  flowing  from  a  given  instrument 
in  a  given  time  is  called  gross  faicOTie-vahie  or  atertr 
IWB  iiwiiii,  during  that  time.  Safiariy,  th«  totd 


64  ELEXENTAKY  PXINaPLES  OF  ECONOIOCS    (Chat.  IV 


of  its  costs  is  called  outgo-value  or  simply  outgo.  The 
total  gross  income  during  a  given  time  minus  the  total 
outgo  (i.e.,  the  value  of  its  costs),  constitutes  net  income. 
Thus,  just  as  net  capital  is  found  by  subtmcting  the  lia- 
biUties  from  the  assets  in  a  capital  account,  so  net  income 
m  an  income  account  is  found  by  subtracting  the  value 
of  the  costs  from  the  value  of  the  benefits.  Both  benefits 
and  costs,  moreover,  are  ottribukMe  to  a  defimte  capital 
source.  In  income-accounting  the  benefits  or  income-items 
credited  to  capital,  and  the  outgo  or  cost-items  are 
«o*fetf  to  capital.  In  keeping  income  accounts,  therefore, 
It  IS  miportant  to  know  to  what  category  of  capital  any  item 
of  jncome  should  be  credited,  or  any  item  of  outgo  debited. 

S  3.  Income  Aoconnti 

We  are  now  in  a  position  to  apply  the  foregoing  definitioos 
to  income  accounts.  Perhaps  no  other  subject  in  economics 
has  been  so  fraught  with  confusion,  misunderstanding  and 
double  counting,  as  income.  It  wiU  help  the  student  to 
understand  these  accounts  if  he  wiU  bear  in  mind  that  they 
show  the  income  and  outgo  which  any  given  capital  (or  free 
human  being)  yields.  We  are  apt  to  think  of  income  and 
outgo  too  much  with  reference  to  the  owner  of  the  income 
mstead  of  the  source  of  the  income.  It  will  be  easy  later 
to  make  up  the  owner's  income  account ;  but  first  we  must 
omstruct  the  income  account  for  an  isolated  article  of  capital. 

We  may  begin  by  imagining  a  certain  "  house-and-lot  '* 
as  one  composite  instrument  or  article  of  wealth,  and  may 
first  consider  its  income  and  outgo  during  the  calendar 
year  1910.  The  instrument  is  capital,  and  the  income  which 
this  capital  brings  to  its  owner  may  be  either  a  money  rental 
or  the  direct  shelter  and  similar  benefits  of  the  house  enjoyed 
by  hunself  and  his  famfly.  In  either  case  the  income  may 
be  mnsured  in  money,  although  in  the  case  of  occupancy 
by  the  owner  this  measurement  requires  a  apeckl  appraise- 


65 


mcnt.  The  house,  let  us  suppose,  was  built  many  years 
ago,  and  is  now  nearly  worn  out.  It  yidds  an  income  worth 
$1000  a  year,  /^(alnst  its  income  there  are  offsets  in  the 
form  of  repairs,  taxes,  etc.  —  costs  which  it  occaaoni.  We 
have,  then,  the  fdlowing  "  mcome  account " :  — 

INCOME  ACCOUNT  FOR  HOUSE  AND  LOT  DURING  THB 

YEAR  1910 
Imcomx  Outgo 

UwofhoaMaadlot .  .  Iiooo    Repairs  $200 

Taxes  180 

^■>yi>»nr»  ......  90 

$1000  t4*9 
Net  income    ....  $600 

Next  year  the  house  is  found  to  have  rotten  timbers,  is 
condemned,  and  must  be  abandoned  or  torn  down.  Its 
benefits  are  ended,  but  the  land  is  still  good,  and  the  owner 
can  build  a  new  house.  The  period  consumed  by  thi  3  opera- 
tion is  the  first  six  months  of  the  year  191 1,  so  that  during 
such  period  there  is  no  income  attributable  to  the  house  and 
lot,  but  only  outgo.  Durii^  tte  second  half  oi  die  year  tbe 
house  is  occiqrfed,  and  its  use  is  valued  at  $600.  In  the  first 
six  months  not  only  did  the  "  house-and-lot "  fail  to  yield 
any  income,  but  it  occasioned  a  cost.  This  cost  was  the 
cost  of  prodmHom  oi  the  new  house. 

We  have,  then,  the  loUowiiig  acooimt:— 

INCOME  ACCOUNT  FOR  HOUSE  AND  LOT  DURING  THE 

YEAR  1911 
iHcom  Outgo 
Um  ol  hottw  ud  lot  (fix  Expeoae  of  baflding 

bobOs)  Wee       house  |io,ooo 

  Taxes  and  insuiance  .  100 

liiteviaB  tOiffM 

Dunig  this  year,  then,  the  hemt  oases  a  net  outgo  of 

$9500.  Atiiek]ioir,aaa»ttaie*'iieeeMiyevfli";  thiy 
ff 


66 


xunoEMTAiy  noKOLn  of  ioohomics  IciMr.if 


lead  to  good,  though  not  good  themselves ;  and  this  cost  of 
constructing  the  house  was  incurred  only  for  the  sake  of 
eq>ected  future  bendfi's.  The  advene  balance  it  creates  ii 
oidy  temporar} ,  and  ahouM  be  more  than  made  up  in  the 
years  which  follow. 

For  the  year  191 2,  for  instance,  we  may  have  the  follow- 
ing:— 

'IC^ME  ACCOUNT  FOR  HOUSE  AND  LOT  DURING  THE 

YEAR  1913 

TWOOMB  OOTOO 

Vwt   .......  $1300     Repairs  $  50 

  TuM  and  intuiaaoe  .  .  ay 

$1300  I300 
Net  income  fiooo 

These  figui  emain  about  the  same  for  forty-nine  years 
and  give  $49,000  net  income  during  that  time,  offsetting  the 


ifit    i*ia    ifli4   i«M    Itl*    itir  WW 


WW 


It  10 


Wll 


mm 


ouTfio<  excess  in  cost  for  191 1  ($9500)  and  leav- 

"tStr  ing  a  large  margin  b^des.   Then  the 

house  is  worn  out  a  seomd  time  and  has 
to  be  rebuilt.  The  same  cycle  is  repeated, 
one  year  of  excess  of  cost  being  offset  by 
fwty-nine  years  of  excess  of  fatcmne.  Figure  a  shows  a 
part  of  this  cycle,  pkturing  gr^phicalty  the  figures  ui  the 
above  income-and-outgo  accounts. 

It  will  be  observed  that  the  cost  of  reconstructing  the 
house  was  entered  in  the  accounts  in  exactly  the  same  way 
as  tlw  cost  of  npelring  it  or  as  any  otber  co^  This  vmy 


Sicjl 


moom 


be  puzzling  at  first,  becaiue  most  of  the  other  costs  are 
fairly  regular  year  by  year,  whereas  the  cost  of  reconstruc- 
tion occurs  only  once,  or  at  any  rate  only  <mce  in  a  long  irtiflt. 
It  may  also  seem  punUng  ^jecause  the  cort  of  reconstruc- 
tion is  so  large  in  comparison  with  other  costs.   But  the 
irregularity  or  size  of  costs  is,  of  itself,  no  reason  for  omitting 
them  from  our  accounts.  The  only  way  in  which  we  caa 
escape  recording  such  a  cost  — for  instance,  the  cost  of 
constructing  the  house  —  is  by  substituting  in  its  place  an 
equivalent  series  of  smaller  and  more  regular  costs.  What 
is  called  a  depreciation  fund  is  sometimes  created  for  tiiii 
very  purpose.  This  fund  is  accumulated  during  the  exist- 
ence of  the  house  by  setting  aside  annually  small  portions 
of  the  income  yielded  by  the  house,  sufficient  in  the  aggre- 
gate to  replace  the  house  when  it  is  worn  out.  The  depred- 
ation I  nd,  combined  with  the  "  house-and-lot "  renden 
the  flo^  of  costs  uniform  or  regular.   But  even  when  a 
depreciation  fund  is  used,  we  can  only  say  that  the  com- 
bination of  the  two  things  (the  fund  and  the  house)  has  a 
i^ijlarcoat.  We  cannot  say  that  this  is  true  of  Uie  house 
by  itself;  and  when  no  such  device  as  a  depreciation  fund 
at  all  is  used,  there  can  be  no  escape  from  charging  the  cost 
of  reconstruction  in  precisely  the  same  way  as  we  charge  any 
other  cost  If  this  still  seems  puxding,  it  is  because  we  are 
in  the  habit  of  seeing  the  cost  of  reconstruction  entered  as 
the  value  of  the  house  and,  hearmg  it  called,  for  that 
reason,  a  "  capital  cost."   It  is  true  that  the  valm ^  iktntm 
house  must  be  entnred  cm  the  capital-balance  shert;  bat 
the  cost  of  producing  it  belongs  properly  to  the  income  ac- 
count. The  value  relates  to  an  instant  of  time  (which 
may  be  any  instant  from  the  time  the  house  is  bcfun  tiD 
the  timewfaen  it  ceases  to  eiist) ;  the  cost  relates  to  a  peri^ 
of  time  (which  may  be  all  or  any  part  of  the  time  during 
which  the  labor  and  other  sacrifices  occasioned  by  the  house 
occur).    The  value     tiie  house  is  quite  iSa^BBxX  from  tht 
seiiesof  costs  by wfaidi  it  was  buiit,  alOwoih  iSubtaeMm 


68 


between  the  two  is  natural  in  view  of  the  bookkeeping 
practice  of  entetbgca|)ital  at  its  con  vahw."  The  home 
on  which  $10,000  was  expended  for  constructioa  may  be 
worth  either  more  or  less  than  $10,000.  In  either  case  the 
inooiBe  account  should  contain  $10,000  on  the  outgo  side, 
and  the  capital  account  a  larger  or  smaller  figure,  as  the 
caae  may  require. 

§  3-  Dovicea  for  Making  Net  Incomo  Regular 

We  have  seen  that  the  irregularities  in  the  net  annual 
income  or  outgo  flowing  from  the  "house-and-lot"  may  be 
combined  with  the  opposite  irregularities  of  the  net  an- 
nual outgo  or  mcome  from  a  "  de^edatkm  fund,"  so  that 
the  net  result  from  the  two  combined  is  a  steady  net  in- 
come.  The  same  result  may  be  secured  in  other  ways. 
F<w  instance,  if  the  owner  of  the  house-and-lot  happens  to 
own  a  large  number  of  other  hnuaes-and-lots  in  different 
degrees  of  repair,  the  irregularities  in  income  from  them  in- 
dividually may  tend  to  oflFset  each  other.  Thu.s,  if  a  man 
owns  fifty  houses,  each  lasting  fifty  years,  and  every  year 
one  wears  out  and  has  to  be  rebuilt,  it  is  then  evident 
that  he  will  have  an  expense  of  $10,000  every  year  for  the 
rebuilding  of  a  house,  which  will  be  a  regular  item ;  and 
he  win  have  a  regular  income  balance  as  a  consequence, 
because  he  will  get  the  benefit  of  forty-nine  houses,  wWch 
will  far  outweigh  the  cost  of  building  only  one.  The  differ- 
ence will  be  his  net  income,  which  will  be  a  fairly  regukr 
amount  year  after  year. 

This  example  ought  to  set  at  rest  any  fingering  doubts 
as  to  the  correctness  of  our  includmg  the  cost  of  recon- 
structing a  house  as  an  item  of  outgo,  to  be  entered  as 
audi  In  a  true  and  complete  income  account.  The  only 
feaaon  thk  may,  at  first,  aeem  wrong  k  that  the  cost  ol 
reconstruction  is  not  usually  a  regular  item.  In  the  case 
of  the  fifty  houses  it  becomes  a  more  or  less  regukr 


But  if  it  is  correct  to  call  it  outgo  when  there  ur  fifty 
houses^it  muit  be  conect  to  cdl  ft  outgo  wImb  thm  an 

ten  houaet  or  when  there  is  only  one.    Irregularity  of  in- 
come is  an  inconvenience  and  we  usually  seek  to  avo*-* 
by  depreciation  funds,  by  having  a  large  number  of  art 
at  different  stages  of  repair,  or  otherwiie.   But  lo  long  •• 
Irregularity  of  income  ejdsts  it  must  be  entered  as  such. 

The  effect  of  reducing  irregularities  by  combining  a  large 
assortment  of  articles  is  present  wherever  a  sufficiently 
large  assortment  edsts.  Professor  Clarii  of  Cohmibia  Uni- 
versity suggests  a  helpful  simile  when  he  compares  a  stock 
or  fund  of  capital  to  a  waterfall:  the  drops  of  water,  or 
component  parts  of  the  waterfall  or  fund,  are  constantly 
dia^g;  but  the  waterfall  or  fund  leniains  lubttanriaWy 
the  tame. 

14.  B0ir  to  CndU  MiA  Mil 

Before  leaving  the  subject  of  iooome  aoooimts,  we  diaB 

speak  of  one  particular  kind  of  cafutal,  namely,  a  stock  of 
cash.   This  will  furnish  an  opportunity  to  illustrate  anew 
some  of  the  principles  of  accounting  which  we  have  just  dis- 
cussed. What  pulses  the  novice  in  aooomtiDg  is  the  manner 
of  debiting  and  crediting  a  stock  of  cash,  or  what  ;  called 
the  "  cash  drawer."   At  first  sight  the  usar"*  seems  to  be  the 
opposite  of  what  it  should  be.   To  understand  tht  practic 
of  accountants  in  this  particular  is  to  go  a  loiig  wa^'  to«a"  i 
understandmg  the  main  principles  of  accounting.   It  witi 
help  us  to  understand  it  if  we  lien  a  cash  drawer  to  d  pH 
mine.  We  credit  a  gold  mine  with  all  the  gold  extract  ^ 
and  we  debit  it  with  an  the  costs  pfutbto  it  Intheewi  ' 
the  gold  mine,  what  it  co^  to  ruii  it  is  outgo ;  all  of 
yield  of  gold  is  gross  income ;  and  the  difference  is  the  m 
income.   Similarly,  the  gross  income  from  the  cash  draw 
con^ts  of  what  tiie  cadi  drawer  yidds,  or  whatever  csMp 
outtrfit  It  benefits  us  whenever  it  pays  our  bills ;  itcoifi 
ui  wbeoever  we  pay  its  bilb,  U.,  idienevcr  we  pay  son^ 


TO         KLKXBNTAKY  FUMCIPLII  OF  BCONOKICS  fCkiAlf 


thing  into  it.  All  the  payments  which  we  have  to  make  h 
the  drawer  are  a  cost  of  that  drawer  to  us,  whereas  all  the 
payments  that  we  make  by  the  drawer  are  the  benefits  which 
Hpradaoeiioriis.  AskagMfMpaymoBiyintothedrftwer, 

we  realize  no  income,  but  merdy  accumulate  capital  for 
future  use.  If  we  should  only  pay  money  into  the  drawer  and 
nevvr  thxou^iout  our  life  take  any  out,  the  "drawer  "  would 
benefit  us  nothing.  Its  benefits  would  go  to  oar  deicendantt 
whenever  they  should  take  the  money  out.  Ordinarily, 
however,  the  money  L  taken  out  soon  after  it  is  put  in.  What 
mi  benefit,  then,  does  the  cash  drawer  yield  in  the  long  run? 
Sddom  anything  at  aH  We  pfty  oat  Just  as  much  ••  w 
put  in ;  and  if  we  subtract  one  amount  from  the  other,  the 
net  annual  income  from  the  cash  drawer  will  be  about  zero, 
unless  during  a  certain  year  we  store  up  more  than  we  take 
out,  or  take  out  more  than  we  put  in. 

The  reason  that  these  credits  and  debits  of  "  cash  "  seem 
at  first  the  reverse  of  what  they  should  be  is  that  we  are  ac- 
custwned  to  think  of  money  reoe^  and  expenditures,  not 
in  their  relation  to  the  stock  of  cash  into  cx  out  of  iHiich  thffy 
are  paid,  but  in  their  relation  to  some  other  item  of  wealth 
on  accoimt  of  which  the  payments  are  made.  If  a  lodging- 
house  keeper  receives  $xo  fnm  a  lodger  and  puts  it  into  her 
cash  drawer,  she  finds  it  hard  to  debit  $10  to  "  cadi."  She 
thinks  of  the  $10  as  income ;  and  it  is  income  with  respect  to 
her  lodging-house,  for  the  latter  has  yielded  it  to  her.  Her 
rtock  of  cash,  howevor,  has  not  yidcbd  the  $10  to  her.  On 
the  contrary,  it  has  taken  that  amount  from  her.  Later  on 
it  will  yield  back  that  amount  or  some  portion  of  it,  and 
at  that  time  may  properly  be  credited  with  the  nun  it 
yidkb  up. 

We  are  now  ready  to  understand  how  to  derive  a  man's 
total  income.  It  is  simply  the  combined  income  from  all 
the  capital  he  owns.  We  could  obtain  a  full  account  of  it  by 
keeping  a  separate  mcome  account  for  each  item  of  capital 
he  owns,  cndit&ig  and  ddbftiog  tatk  audi  km  with  ite  w- 


n 


spective  benefits  and  costs.  The  difference  of  all  the  benefiU 
and  costo  ol  all  his  capital  is  his  net  income.  In  Umm 
accounto  we  ihottkl  todttde,  therefore,  a^  and  negip 

tive  itema  of  income  pertaining  to  aU  positive  and  nega- 
tive items  of  capital.  The  negaUve  items  of  capital  are 
the  liabiUtiea.  LUbiUties  yield  a  net  outgo  IniteMl  of  a 
netincone.  In  cider,  then,  to  fiad  out  the  net  inoome  of 
any  perwn  during  a  certain  day  or  month  or  year,  the 
proper  method  is  to  makf  omplete  statement  of  aU 
assets  and  aU  his  liabil?  ad  for  each  anet  aa  wdl 
as  each  llabiUty,  credit  t)  e  benefita  and  dd>H  aU  the 
The  net  remit  mil  be  the  net  income  of  the 


A  real  person  will  have  a  net  income,  but  a  fictitiaat 
penonwfflnot  We  h«¥e  leen,  fa  the  case  of  fictitious  per- 
•Mis,  thiit  there  is  no  net  capital  because  the  Uabilities  always 
equal  the  assets;  for  what  is  often  caUed  the  capital  of  a 
"  company  "  really  means  the  capital  of  its  stockholden.  Ai 
there  ia  no  net  capital  ol  the  con^y,  as  such,  the  "  com- 
pany "  owing  it  an  to  the  stockholders,  so  there  is  no  net 
income  of  the  company,  as  such,  the  "  company  "  paying 
it  all  tr  the  stockholders  or  others. 

The  lowhig  ia  an  imastaaiy  faoome  acooimt  d  a  laH- 
roadoc  yai^:— 

INCOME  ACCOUNT  OT  A  RAILROAD  CORPORATION 
Income  Ootoo 


By  passenger 


and 


To  opcnting  expenses 

To  interest  to  bond- 
holders .... 

To  dividends  to  itodt* 
hcddeiB  .... 

To  surplus  applied  to 
(i)  pordiaae  of  land 
(a)  cash  paid  into 
tiMMuy  • 


ioo,ooe 
aoo^ooo 
140,000 

6.147 


7a  iX£lf£NTASY  PKINCIPLES  OF  ECONOMICS    [Our.  IV 

The  passenger  and  freight  service  has  yielded  $1,246,147. 
That  is  the  gross  income  of  the  road.  All  the  benefits  flowing 
from  that  road  are  worth  this  amount  of  money.   On  the 
other  skle  <rf  the  raiboad  account  we  find  the  costs  of  the 
road  to  the  company;  they  eioctly  equal  the  benefits,  for 
the  company  is  an  abstraction  —  a  mere  holding  concern  — 
not  a  real  individual.   The  outgo  consists  principally  of 
operating  expenses,  $800,000;  interest  to  bondholders, 
$100,000 ;  dividends  to  stockholders,  $200,000.   The  words 
by  and  to  are  usual  in  income  accounts.   The  receipts  are 
benefits ;  they  come  by  virtue  of  the  services  designated. 
The  costs  represent  something  which  has  to  be  given  to 
these  several  items  in  order  to  make  the  benefits  possible. 
These  items  leave  a  surplus,  part  of  which  is  expended  for 
land  ($140,000) ;  this  is  a  cost  just  as  much  as  anything 
dse.  Then  thoe  b  cash  left  in  the  treasury  to  the  amount 
of  $6147.   It  must  not  be  omcluded  that  this  cash  is  a  net 
income.   The  cash  drawer  swallows  it  up.   The  company 
loses  $6147,  so  to  speak,  in  feeding  its  cash  drawer.  There- 
fore the  two  sides  of  the  account  balance,  and  there  is 
net  ittcane  at  aO  to  the  "conq>any." 

S  5-  Omissions  and  Errors  in  Paetic9 

Practically,  however,  it  is  not  convenient  to  enter  in  an 
income  or  a  capital  account  everything  which  theoretically 
ought  to  be  entered  there.  Moreover,  capital  and  income 
accounts  are  not  always  treated  consistently  in  practice. 
For  instance,  in  a  capital  account  a  man  would  not  ordi- 
narily enter  his  own  person,  as  a  free  human  being  is  not 
ordinarily  counted  as  wealth;  and  yet  in  his  income  ac- 
count he  will  enter  the  numey  he  earns  or  the  work  that 
he  does.  That  is,  work  and  wages  are  entered  in  the  income 
accounts,  but  the  corresponding  items  representing  the 
agencies  which  do  this  work  or  earn  these  wages  are  not 
entered  in  the  capital  accounts.  The  correspondence  be- 


SBC  si 


INCOME 


73 


tween  the  two  accounts  is,  therefore,  obscured.  On  the  other 
hand,  a  man  never,  in  practice,  enters  in  his  income  account 
the  shelter  of  his  own  house  as  a  benefit,  and  yet  he  may 
indude  the  house  among  his  assets  in  his  capital  account 
In  ideal  accounting  we  should  insist  upon  recording  every 
benefit  of  any  kind,  every  cost,  and  every  source  of  benefit 
or  cost.  As  we  have  already  indicated,  an  early  economist 
fdi  into  enor  when  he  said  that  a  dwelling  occupied  by  the 
owner  yields  no  income.  He  claimed  that,  on  the  contrary, 
it  is  a  source  of  expense.   Evidently  he  had  in  mind  only 
those  costs  and  benefits  which  come  in  the  fonn  d  monqr 
payments.  One  certainly  gets  no  money  benefits  by  living  in 
his  own  house,  while  he  does  suffer  a  money  cost  to  run  it. 
So  far  as  money  receipts  and  expenditures  are^  amcemed, 
therefore,  the  house  costs  more  than  it  brings  in.  But  no 
man  would  keep  his  house  if  it  did  not  afford  him  benefits 
greater  than  its  costs.  We  should,  therefore,  appraise  the 
shelter  of  the  house  and  enter  this  as  its  gross  income. 
K  we  do  not,  we  reach  the  absurd  condusicm  that    I  five 
in  my  own  house  and  you  Hve  in  your  own  house,  neither  of 
us  receives  any  income;  but  if  you  rent  your  house  to  me 
and  I  rent  mine  to  you,  then  we  shall  each  be  receiving 
income  i  Obviously  the  income  is  really  there,  all  the  time, 
in  the  form  of  shelter;  and  ¥*en  one  man  rents  another 
man's  house,  he  gets  the  shelter-mcome  and  gives  the  other 
man  a  money-income  in  its  place. 

An  accoimt  of  money  received  and  expended  by  a  givw 
person  can  sometimes  furnish  a  fairly  complete  picture  of 
his  income ;  but  only  when  two  conditions  exist ;  namely, 
that  all  the  income  from  his  property  is  in  the  form  of 
money,  and  all  the  outgo  is  in  the  form  of  money  spat 
for  personal  satisfactitHa  («.e.,  goes  directly  to  pay  for 
clothes,  food,  shelter,  amusements,  and  the  like,  and  is  not 
expended  in  investments,  repairs,  and  the  e]q>enses  of  run- 
ning a  business).  Under  these  conditicma  tl«  caih  dnwtt 
•ad  the  caih  accQootcqpitlmta  a.  tod  <<  gmwy  w^vj 


74  ELEMENTARY  PKIMCIPLES  OF  ECONOUICS    ^Chav.  If 

income.   These  omditioiu  are  approximately  fnlfiBed  when 

people  live  in  a  dty  and  rent  the  houses  or  furniture  of 
others  instead  of  owning  them  themselves.    Such  people 
get  imctically  all  of  their  income  in  the  form  of  money 
receipts,  as  salaries,  dividends,  and  interest.    This  money 
is  spent  for  benefits,  as  food,  clothing,  theater  going,  etc. 
The  cash  drawer  (or  bank  account)  then  intervenes  be- 
tween the  m<m^-4ncome  on  the  <me  hand,  and  the  final 
income  which  this  money-income  buys,  mi  the  other  hand; 
much  as  a  cogwheel  intervenes  to  transmit  motion  from 
one  part  of  a  machine  to  another.    A  man  who  receives 
$5000  a  y«ir  in  money  or  checks  and  spends  it  all  on 
food,  clothing,  shelter,  amusonents,  and  other  final  or 
enjoyable  benefits,  and  gets  no  such  benefits  from  any 
other  source,  evidently  receives  a  real  income  of  $5000 
a  year,    ffis  money  income  correctly  measures  his  real 
income.    But  if  he  "  saves  "  part  of  the  $5000,  *.«.,  ex- 
pends it  for  stocks,  bonds,  or  a  savings  bank  account  or 
any  other  capital,  the  benefits  from  which  are  greatly  de- 
ferred, his  real  iacome  may  be  leas  than  $5000;  while  if 
he  derives  shelter  from  hia  own  house,  or  food  from  his 
own  garden,  his  real  income  may  be  greater  than  his 
money  income.    Thus  money  income  is  an  unsafe  indica- 
tfcm  of  real  income.    TTie  only  method,  then,  of  construct- 
ing income  and  outgo  accounts  which  will  be  correct  and 
which  can  serve  as  a  basis  for  economic  analysis  is  the 
method  already  indicated  —  the  method  by  which  are  re- 
adied, for  each  artide  of  capital  (including  human  bemgs), 
the  values  of  all  its  benefits  and  all  its  costs.  These  ben^ts 
and  costs  are  of  many  kinds.   Sometimes  they  consist  of 
money  payments  —  not  in  themselves  enjoyable  to  anybody ; 
Kunetimes  they  conast  of  merely  intermediate  or  produc- 
tive operations;  and  sometimes,  of  truly  final  or  enjoyable 
elements.   All  these  items  should  be  entered  in  the  accounts 
on  the  same  footing ;  but  we  shall  see  that  all  except  the 
"  enjoyable  '*  elements  wiD  cancel  among  themselves. 


CHAPTER  V 


OniBIHING  INCOICB  AOOODNTS 

S  I.  Methods  of  "  Balances  "  and  "  Couples  " 
"  Interactions  " 

We  have  now  learned  how  to  reckon  the  income  of  either 
a  real  or  a  fictitious  person.  Of  reckoning  the  income  of  all 
society,  on  the  other  hand,  there  are  many  ways,  including, 
in  particular,  two  that  correspond  to  the  two  ways  which  we 
discussed  in  Chapter  III  of  reckoning  society's  capital. 
These  are  the  method  of  balances  and  the  method  of 
couples.  The  method  of  balances  is  very  easy  to  apply.  All 
fkat  is  necessary  is  to  make  up  an  income  account  for  any 
given  period  for  each  instrument  or  article  of  wealth  so  as 
to  include  all  possible  income  or  outgo  in  society  and,  de- 
riving from  each  such  accmint  the  net  balance,  ackl  tiiese 
net  balances  together.  The  result  is  the  total  income  of 
society.  Its  constituent  parts  are  the  net  inoomes  irom 
the  several  articles  of  society's  wealth. 

The  "  method  of  couples  "  is  somewhat  more  difficult  to 
folbw.  But  it  is  also  more  important.  Just  as  it  often 
happens  that  the  same  item  in  capital  accounts  is  both  asset 
and  liability,  according  to  the  point  of  view,  and  is  therefore 
self-canceling,  so  it  oftoi  happens  that  the  same  ..tern  in 
income  accoimts  is  both  benefit  and  cost,  and  is,  therefore, 
likewise  self-canceling.  In  fact,  the  reader  may  have  felt 
that,  in  many  uf  the  examples  dted,  what  we  called  costs 
were  really  benefits.  He  may  have  asked  himsdf:  Why 

7$ 


76 


ELEMENTAKY  FKINCZPLKS  GT  XCONOMKX  IQur.V 


should  we  call  rquuring  a  house  a  cost?  Won  a  caipenter 

and  his  tools  repair  it,  do  we  not  credit  him  and  them  with 
a  service  performed?  Is  not  any  production  a  benefit? 
Have  we  not,  then,  placed  repairs  on  the  wrong  side  of  the 
ledger?  It  all  depmds  upcm  which  of  two  accounts  we  are 
considering.  When  a  carpenter  with  his  plane,  hammer,  and 
saw  helps  to  rebuild  a  house,  we  have  to  consider  two  groups 
of  capital.*  One  group,  the  carpenter  and  tools,  is  acting  on 
the  other  group,  the  house.  The  carpenter  ami  tools  cer- 
tainly perform  a  service  or  benefit,  but  the  hoitse  does  not 
Considered  as  occasioned  by  the  house,  the  repairs  are  costs. 
The  house  absorbs  or  soaks  up  these  costs,  promising  to  com- 
pensate for  them  by  ben^ts  to  be  yielded  lata*  on.  The 
renailing  of  loose  shingles  is  certainly  not  what  the  house  is 
for ;  with  respect  to  the  house,  it  is  a  necessary  evil ;  with 
respect  to  the  hammer,  however,  it  is  a  service  rendered. 
Therefore  the  repairing  of  the  hoiue  is  at  once  a  ben^t  and 
a  cost. 

Such  double-faced  events  are  so  important  as  to  require  a 
qwdai  name.  We  shall  call  them  interactions.  Each  inter- 
actikm  takes  place  between  two  instruments  or  groups  <A 

instruments. 

An  interaction,  then,  is  a  double-faced  event,  at  once  a  bene- 
fit or  service  of  the  acting  instrument,  and  a  cost  or  disserv- 
ice of  the  instrument  acted  on.  Thare  can  nevnr  arne  the 
slightest  doubt  as  to  when  it  is  to  be  regarded  as  positive  and 
when  negative.  The  definitions  of  benefit  and  cost  settle 
this  question  in  each  case.  If  it  is  desired  by  the  owner  of 
a  gh«n  instrument  that  this  instrument  ^uld  occasi<m  a 
given  event,  then  the  event  is  "desirable"  or  a  benefit. 
If  it  is  desired  that  an  instrument  should  not  occasion  a 
given  event,  then  the  event  is  "  vmdesirable"  or  a  cost. 
Thus,  since  the  homt  vmtua  desires  that  the  house  should 
mt  occasicm  rq>afa%  tluse  rcfMirs  are  costs  tA  the  haaat; 

'  In  this  instance  and  throughout  the  following  discussion  we  shal 
coDudei  capital  in  its  broader  tenae  as  including  free  human  beings. 


ooKSiiniio  maaat  aooodirs 


77 


and  since  he  desires  that  the  toob  should  produce  repairs, 
sttdi  repairs  are  the  benefits  from  those  tools. 

The  example  given  is  typical  of  the  general  relations  be- 
tween interacting  instruments.  The  mental  picture  we 
should  construct  is  that  of  two  distinct  groups  of  capital 
Group  A  acts  on,  and,  so  to  speak,  benefits  Group  B .  What- 
ever the  nature  of  this  interaction,  A,  the  giver  of  the  bene- 
fit, is  credited  with  it  and  B,  the  recipient,  is  debited  with 
it  as  a  cost.  These  two  .>,ems  of  credit  and  detut  are  equal 
and  simultaneous  because  they  are  the  selfsame  event 
looked  at  from  oppos?*e  sides. 

Interactions  constitute  the  great  majority  of  the  elements 
which  enter  into  income  and  outgo  accounts.  Theorfy 
boi^ts  which  do  not  form  merdy  the  positive  side  of  such 
canceling  interactions,  and  so  do  not  cancel  out,  are  soHs- 
faciions  —  dewrabh  conscious  experiences  —  often  called 
"  consumption  "  (these  are  credited  to  the  things  enjoyed 
—  for  liistance,  a  bouse) ;  and  the  only  costs  which  do 
not  form  merely  the  negative  side  of  such  canceling  inter- 
actiops,  and  so  do  not  cancel  out,  are  "  labor  and  trouble  " 
(these  are  debited  to  human  beings).  But  these  two 
final  danoits  — "  satisfactkns,"  on  the  one  hand,  and 
"labor  and  trouble,"  on  the  other  — are  only  the  outer 
edges  of  the  series  of  interactions.  Between  them  Ues  a 
connective  chain  of  productive  processes  and  commercial 
tranttctkms,  every  link  of  whidi  has  two  sides,  a  i)ositive 
side  jf  benefits  or  services  and  a  negative  side  of  coats, 
always  mutiially  canceling. 

Sa.  Roductioa:  lutacactlot    /likki  Chanite  th*  Vom  «f 

Weaitli 

The  interactions  betw^n  two  articles  or  groups  of  articki 
are  of  three  chfef  kimb:  changes  in  the  form  of  weal^ 
changes  in  the  portion  of  wealth,  and  changes  in  the  owner- 
ah^  of  wealth;  in  other  words,  transformation,  trausporta- 


78  ELElfENTASY  PSINCIPLES  01  ECONOMICS  (CHAT.f 

don,  and  transfer  or  exchange.  All  three  may  be  called 
"production,"  although  this  term  is  sometunes  confined  to 
the  first  two  and  sometimes  even  to  the  first  alone.  These 
we  shall  take  np  in  ordo*,  and  show  how  each  is  a  two- 
faced  event  or  an  interaction. 

First,  what  is  here  called  "  transformation  "  of  wealth  is 
practically  identical  with  what  is  usually  understood  by 
"  production  "  or  "  productive  processes."  By  this  trans- 
formation or  change  in  the  form  of  wealth  is  meant  the 
change  of  relative  position  of  its  parts.  Weaving,  for 
instance,  is  the  transformation  of  yam  into  cloth  by  a  re- 
arrangement in  the  relative  positions  of  the  warp  and  woof. 
Spinning,  likewise,  consists  in  moving,  stretching,  and  twist- 
ing fibers  into  yam ;  sewing,  in  changing  the  position  of 
thread  so  that  it  may  hold  cloth  together;  and  so  it  is 
with  carding,  yroci  sorting,  shearing,  and  aU  the  other 
operations  which  constitute  the  manufacture  of  fabrics. 
All  these  operations — which  include  all  manufacture  and  all 
agricuUure  —  consist  simply  of  a  series  of  transformations 
of  wealth,  each  transformation  bdng  a  two-faced  operatioii. 
With  respect  to  the  transformed  instrument  or  instruments, 
the  transformation  is  a  cost ;  with  respect  to  the  transform- 
ing instrument  or  instruments  it  is  a  benefit.  So  it  is 
whoi  a  loom  produces  doth  out  of  yam,  or  when  laiui 
renders  a  service  in  producing  wheat.  So  it  is,  not  only 
when  a  carpenter  and  his  tools  build  or  repair  a  house, 
but  also  when  the  painter  decorates  it  or  the  janitor 
deans  it;  or  whoi  a  cobbler  transforms  leather  Into  shoes, 
or  when  a  bootbla^  tiansfonns  dirty  shoes  into  dean  and 
polished  ones. 

The  prindple  is  not  altered  when  the  interaction  consists, 
not  in  producing  a  change,  but  in  prevoiting  one.  A  ware- 
house renders  its  service  as  a  means  of  storing  bales  of  cotton, 
».«.,  protecting  them  from  the  elements ;  and  this  storage  is, 
on  the  part  of  the  stock  of  cotton,  an  dement  of  outgo,  or  ex- 
pense, as  on  the  part  of  the  warehouse  it  is  an  item  of  income. 


8s&  a] 


OCnUONINO  INCOME  ACCOUNTS 


79 


Nor  is  tbe  princ^  altered  when  there  are,  as  indeed  is 
usually  the  case,  more  articles  than  one  in  either  or  both  of 
the  two  interacting  capitals.  Plowing,  or  the  transformation 
of  land  into  a  furrowed  form,  is  performed  by  a  plow,  a 
hme,  and  a  man.  The  plowing  is  a  cost  <^ted  to  the  land, 
on  the  one  hand,  and  at  the  same  time  a  service  credited  to 
the  group  consisting  of  the  plow,  horse,  and  man,  on  the 
other. 

Nor  is  the  principle  altered  if  one  or  more  of  the  trans- 
forming ag'^nts  perish  in  the  transformation  and  another 
comes  for  the  firat  time  into  existence.  Bread  making  is  r. 
transiormation  debited  to  the  bread  and  credited  to  tltt  cook, 
the  range,  the  flour,  and  the  fut.1,  of  which  the  last  two  are  con- 
sumed as  soon  as  they  perform  their  services.  Agents  which 
disappear  in  the  transformation,  but  reappear  in  whole  or 
in  part  in  the  product  (as  here  the  flour),  are  called  "  am 
materials."  The  production  of  cloth  from  yam  is  a  trans- 
formation effected  by  means  not  only  of  the  loom,  but  also  of 
a  number  of  other  agents,  among  them  the  yam  itself, 
which  thus  vanishes  as  yam  and  reaiq)ears  as  <^th.  Tht 
cost  <^  weaving  includes  the  consumption  of  raw  material 
—  yam;  and  this  consumption  of  yam  is,  on  the  part  of 
the  yam  itself,  not  cost,  but  service.  It  s  the  use  for 
which  the  yam  existed.  When  doth  is  turned  into  dodies, 
this  transformation  is  a  service  to  be  credited  to  the  doth, 
and  a  cost  to  be  debited  to  the  clothes.  All  raw  materials 
yield  benefits  as  they  are  converted  into  finished  products. 
Their  conversion  is,  however,  on  the  part  of  these  prod- 
ucts, always  outgo  and  not  income. 

In  general,  production  consists  of  a  succession  of  stages, 
and  at  each  stage  there  is  an  interaction.  The  finished 
product  of  one  stage  passes  over  as  the  raw  material  <rf  Ac 
next,  and  its  paas^^  6xHn  thp  earlier  to  the  later  stage  u  aa 
interaction  between  the  capitals  of  the  two.  Each  opera- 
tion i*-  credited  to  the  group  of  instruments  earlier  in  the 
series  md  debited  to  the  groi^  next  lator  in  the  series. 


80          BLEM£NTAKY  PRINCIPLES  07  ECONOMICS     [Cbat.  V 


id.  TwMyortotioa;  Interactions  widek  Cka^  Iht  FmI- 

tim  ol  WmUIi 

The  second  class  of  intenctioos  we  have  called  "  tarn- 

portation."  It  is  a  very  slight  distinction,  whidi  scpantei 
this  class  from  the  preceding  class.  Transforming  or  pro- 
ducing wealth  consists  in  changing  the  position  of  its  parts 
as  related  to  one  another;  transporting  wealth  coosists 
mechanically  in  changing  the  position  of  that  wealth  as  a 
whole.  But "  part "  and  "whole  "  are  uiemselves  loose  and 
relative  terms.  Bookbinding  is  a  transformation  or  pro- 
dttctioaof  wealth;  it  assembles  the  paper,  leather,  thread, 
and  paste  iTito  a  whole  book.  Delivering  the  finished  book 
to  a  Ubrary  is  transportation.  Yet  the  library  is,  in  a  sense, 
a  whole ;  and  to  assemble  books  into  a  classified  and  organized 
Ubnury  b  to  make  a  whole  out  of  parts  and  may  be  regarded 
as  a  transformation  or  production  of  wealth.  The  distinction 
between  transformation  and  transportation  is  thus  merely 
one  of  convenience.  Many  writers  prefer  to  include  them 
both  under  "  prodttctitm."  We  jnefer  to  include  them  vmda 
the  less  ambiguous  and  more  inclusive  head  of  "  inter- 
actions," and  our  object  here  is  not  to  emphasize  their 
di£ference  but  their  similarity.  The  principles  aheady 
dbcussed  of  coupiing  and  canoiUiig  eqpial  and  q^xMite 
items  apply  also  to  transportation.  The  following  are 
examples.  When  merchandise  is  transmitted  from  one 
warehouse  to  another,  the  stock  in  the  first  warehouse  is 
credited  with  the  change  and  that  m  the  seoMid,  delnted. 
The  stock  which  has  rendered  up  the  merchandise  has  done 
a  service;  that  which  has  received  it  is  charged  with  a 
cost.  A  banker  who  takes  money  from  his  vaxilt  and  puts 
it  into  his  till  will,  if  he  keq»  separate  accounts  for  the  two, 
credit  the  vault  and  debit  the  till.  When  wheat  is  carried 
from  wheatfield  to  bam  the  wheatfield  is  credited  and  the 
bam  debited.  When  wheat  is  imported  from  Canada, 
Canada  is  credited,  and  the  United  $m»  d^ted. 


Sk.4]  CQMBIMINO  mCOMB  ACCOUNTS 


8t 


14.  f  HilMm  Mini  Hum  Trtilrli  ^■■gt  '^TrY| 

ol  WMlth 

Tbe  third  dais  of  interactions  is  the  change  of  ownership 
of  wealth  or  of  property.  This  has  been  called  "transfer." 
Every  transfer  is  a  spedes  of  interaction.  If  two  dollars 
an  transferred  bom  Smith's  cash  drawer  to  Jones's,  Smitli's 
cash  drawer  is  credited  with  the  two  dollars  yielded  up,  and 
Jones's  b  debited  with  receipt  of  the  same.  Transfers  usually 
occur  in  pairs,  and  involve  two  objects  transferred  in  oppo- 
site directtons  between  two  ownen.  One  transfer  pertdns 
to  each  object.  Such  a  double  transfer  we  have  called  an 
exchange.  Since  an  exchange  consists  of  two  transfers,  and 
since  a  transfer  is  a  species  of  interaction  and  as  such  is  self- 
canceling,  every  exchange  is  sdf-canffiHng,  and  toioe  cannot 
be  counted  as  a  part  of  the  total  income  of  sodety  unless  it 
be  counted  out  again  (although  it  may  lead  to  later  items 
which  are  not  self-canceling).  Whatever  is  credited  on  one 
side  is  debited  on  the  otl^.  This  is  dx>wn  In  tl^  following 
sdieme  which  gives  the  credits  and  debit«  involved  when 
goods  worth  $2  are  sold.  The  dealer  credits  his  stock  of 
goods  and  debits  his  "  cash,"  while  the  buyer  does  the 


Stocks  or  Goods 

Stocks  or  Cash 

Cr.  %2 

Dr.  $a 

Dr.  <3 

Cr.  $a 

opposite.  We  see,  then,  that  an  exchange,  whether  of 
goods  against  goods  or  of  goods  against  money,  oocaaii»» 
an  dement  of  income  to  the  sdler  eqpial  to  the  corre- 
sponding dement  of  outgo  to  the  purchaser,  and  an  element 
of  outgo  to  the  seller  equal  to  the  corresponding  dement  of 
income  to  the  paxcttaaa,  and  thcrciore  no  iimnediale  fai* 
ooine  at  afl  to  sodety. 
• 


Si 


ELXlfENTARY  PKINCIPLXS  Of  XCONOmCS  (Cbat.V 


lit 


The  effect  of  canceling  these  items  —  the  credit  item  of 
the  seller  and  the  debit  item  of  the  purchaser  —  is  to  free 
the  income  account  for  any  article  from  all  entanglements 
with  eacdumge,  to  wipe  out  all  moaBy4aoomt.  and  to  leave 
exposed  to  view  the  direct  or  natural  income  from  that 
article.  Thus  books  yield  their  natural  income,  not  when 
the  hock  dealer  sells  them,  but  later  when  the  reader 
peruses  them.  The  sale  is  a  mere  prqparatwy  lervice,  a 
credit  item  to  the  book  dealer,  and  a  debit  item  to  the 
buyer.  Only  the  book  remains  in  the  hands  of  the  pur- 
chaser. Again,  a  forest  of  trees  yields  no  natural  income 
until  the  trees  are  felled  and  pass  into  the  next  stage  of  logs. 
The  owner  of  the  forest  may,  to  be  sure,  "  realize  "  on  the 
forest  long  before  it  is  ready  to  be  cut,  by  simply  selling  it  to 
another.  To  the  seller  the  forest  has  dien  yielded  income ; 
but,  as  the  purchaser  has  suffered  an  equal  outgo,  the  net 
result  of  this  interaction,  as  of  every  other,  is  zero. 
Only  the  forest  remains  ready  for  futiu«  use.  Similarly, 
the  money  "  rent "  of  a  rented  house  is,  for  society,  not 
income  at  all.  It  is  income  to  the  landlord,  but  outgo 
to  the  tenant  —  outgo  which  he  is  willing  to  siiffer  solely 
because  of  the  shelter  he  receives.  As  we  may  cancel  the 
landlord's  money-income  against  the  tenant's  money-outgo, 
it  is  clear  that  the  shelter  alone  remains  as  the  income  from 
the  house.  The  shelter-income  is  the  essential  and  abiding 
item,  and  without  it  there  could  be  no  rent-income  to  the 
landl<wd.  Thus  we  see  dearly  the  fallacy  of  the  old  view 
that  a  dwelling  yields  income  only  when  it  is  rented.  Li 
like  manner,  a  railway  yields  as  its  natural  income  solely 
the  transporting  of  goods  and  passengers.  Its  owners  sell 
this  tranqxnrtatioa  servke  Ua  xaiastey,  and  regard  the  rail- 
way amidy  as  a  mcmey-maker;  but  to  the  shq^)ers  and  pas- 
sengers this  same  money  is  an  expense,  and  exactly  offsets 
the  railway's  money  earnings.  Of  the  three  items  — 
money-income  of  the  road,  money-outgo  of  its  patrons,  and 
transportation — the  first  two  mutually  canod  and  leave  only 


Sk.41  COMBIMIMO  DtCOMB  AOCOUMTI  83 

the  third,  transportation,  as  the  cmI  coatribtttfan  of  tht 

railway  to  the  sum  total  of  income. 

We  do  not  mean,  of  course,  that  interactions  are  useless, 
but  simply  that  in  the  accounting  of  sodety  they  are  mV- 

cancding.  They  are  a  necessary  step  toward  achieving  the 
final  income  which  remains  uncanceled,  but  they  themselves 
disappear  under  the  method  of  couples.  We  see  that 
captal  it  not  a  immy  making  macUne,  bat  that  HsiaooBw 
to  society  is  simply  its  services  of  production,  transporta- 
tion, and  gratification.  The  income  from  the  farm  is  the 
yielding  of  its  crops;  from  the  mine,  the  giving  up  of 
its  ore;  from  the  factory,  its  tramfonnation  of  mw  imlo 
finished  products ;  from  conunerdal  caf^tal,  the  passage  of 
goods  between  producer  and  consumer ;  from  articles  in  con- 
siuiers'  hands,  their  enjoyment  or  so-called  "  consumption." 
Altfaoogli  these  ftani  are  aU  measured  ii$  kms  tf  toamf, 
they  do  not  corsist  of  m<mey  receipts.  Those  items  which 
do  consist  of  money  receipts  are  money  receipts  for  in- 
dividuals, never  for  tiie  world  as  a  whole ;  since  each  dollar 
received  by  one  penon  implies  that  some  other  panQB"- 
the  one  from  whom  it  was  received  —  expended  it. 

Similar  principles  apply  to  outgo,  no  i»rt  of  which,  for 
society,  occurs  in  money  form.  The  great  bulk  of  what 
mwthants  call  cost  of  prodnctioii,"  cxpone,  or  ootfo, 
consists  of  money  costs  ^riiich,  as  concerns  society,  carry  with 
them  their  own  cancellation,  and  so  are  not  ultimate  costs 
at  all.  For  manufacturers,  merchants,  and  other  business 
men,  almoat  vmy  outgo  fa  an  caqiense,  l.e.,  oomistt  of  a 
money  payment  But  such  money  payments  are  for 
wages,  raw  matoials,  rent,  and  interest  charges,  all  of  which 
are  incomes  for  other  people.  The  wages  are  the  earnings 
of  labor;  the  payment  for  raw  mateiial  is  received  fay  some 
other  manufacturer,  farmer,  or  miner ;  the  rmt  is  received 
by  the  landlord;  the  interest  charges,  by  the  creditor. 
Lab(»  itself —  human  effort,  not  the  payment  for  it— f»> 


84         TTUfnCTAMY  iUMCVIiBt  09  lOOIIOIIlCi  Klu».V 

Not  oldydo  immey  tnaitctioBt  ooiiq>letdy  ctacd  thtn- 
idves  out  in  redu>ning  the  total  income  of  society,  but  the 
great  majority  even  of  the  natural  benefits  of  capital  do  the 
Mune.  Even  these  natural  benefits  of  capital  consist  for 
the  most  ptrt  <rf  "  intttsctions ;  they  are  tnuisfnnifttioQi 
or  transportations  of  wealth.  They  $n  intermediate  stages, 
merely  preparatory  to  th^  ^nal  enjoyable  benefits  of  wealth, 
and,  after  the  interactions  have  been  canceled  out,  do  not 
enter  as  item  either  on  the  income  or  the  mitgo  side  of  the 
social  balance  sheet  In  Older  to  show  the  ^ect  of  ceaoil- 
ing  out  the  equal  and  opposite  items  entering  into  ever> 
interaction  throughout  all  productive  processes,  let  us  ob- 
icrve  thevaxiout  stages  ttf  pioductioiiirfiidi  begfai  wiUi  the 
fofest  above  referred  to.  The  gross  income  produced  by 
the  forest  is  the  series  of  events  called  the  turning  out  of 
logs.  This  log  production  is  a  mere  preparatory  service,  a 
credit  item  to  the  forest  and  a  dMt  iton  to  the  stodc  of 
logs  of  the  sawmill,  to  which  the  logs  next  pass.  Next  the 
sawmill  turns  its  logs  into  lumber,  and  is  therefore  cred- 
ited with  its  share  in  tliis  transformation  while  the  lumber 
yard  is  deUted  with  the  production  of  hmiber.  Intermedi- 
ate categories  may,  of  course,  be  created,  and  we  may 
follow,  in  like  manner  the  further  transformation,  transpor- 
tation,  and  exchange  to  the  end  of  the  stages  of  produc- 
tion— or  nXba,  to  the  ends;  for  these  stages  s^t  up  and 
form  several  streams  flowing  iu  different  directions.  To  fd- 
low  one  only  of  these  streans.,  let  us  suppose  that  the  lumber 
which  goes  out  from  the  yard  is  used  in  repairing  a  certain 
wardxHise.  TI«:  wardiouse  is  used  fcnr  stcnii^  do  A ;  the 
cloth  goes  from  the  warehouse  to  the  tailor ;  the  tailor  con- 
verts the  cloth  into  suits  for  his  customers ;  and  his  cus- 
tomers receive  and  wear  those  suits.  In  this  series  of 
imductive  services,  all  the  intermediate  services  caaod 
out  hi  **  eonpks  '*  and  leave  m  the  oafy  imranceled  de- 


•s 


ment,  or  fringe  of  final  lervices,  the  use  of  dothet  in  the 
oootumen'  poMWMioii* 

Should  we  stop  our  accounts,  however,  at  earlier  pomts  in 
the  series,  the  uncanceled  frin^  at  which  we  should  find 
ourselves  would  be  some  othci  item.  The  uncanceled  in- 
come item  in  a  prodnctkm  Miiet  is  ahrayi  theporitiveikte 
of  some  intermedfatte  service  or  interaction  whose  negative 
side  does  not  appear,  as  it  belongs  to  a  later  stage  in  the 
series.  This  will  be  dear  if  we  put  the  matter  in  figures, 
stage  by  stage.  TlwfoOofriiif  antheitcmilortlielQnbf 
camp  above  mn^"^,  fai  the  aooounta  of  iti  draer. 


INCX>lfE  ACCXKJNT  FOR  LOGGING  f 


OUTOO 

VMdiaf  of  loptoiMrBi 

The  income  from  the  logging  camp  is  here  seen  to  consist 
in  the  production  of  $50,000  worUi  <rf  logs.  Of  course 
then  are  usaaDy  large  outgoes;  but  as  these  do  not  con- 
cern our  present  point,  for  simplidty  we  leave  them  out 
of  account.  If  we  now  combine  the  account  of  the  logging 
camp  w'  Ui  that  of  the  sawmill,  we  shall  have  accounts  fflte 
the  IdknHng,  in  which,  to  avoid  Mevant  complica- 
tioos,  no  mention  is  made  of  any  outgoes  which  do  not 
happen  to  be  interactions  between  the  groiqw  of  ca|atal 
considered :  — 


INCOME  ACCOUNT  FOR  LOGGING  ^AMP  AND  SAW- 


MILL 

CJOrtAL  SOOKS 

Inoohb 

OOTOO 

Logging  camp  .  .  . 

Yielding  logs  to  saw- 

miB  .   .  .  tso,ec^^ 

Sawmffl  •  •  •  •  . 

Yidding  lumber  t 

Ricei     '  !oi,.s  from 

lumber  yard  96o,otr 

camp  .   .  $5  >^ooo 

86 


ELEMENTARY  PBINCIPLES  OP  ECONOIQCS  [Chat.V 


o 

a> 

IS 


o 


H 

CO 


CO 


8 


8 


Saa  5]  OOiaiNINO  INOOiCB  ACCOUNTS  87 

In  this  case,  canceling  the  two  k>g  items  of  $50,000  each, 
we  have  left  only  the  lumber  item;  that  is,  the  net  income 
from  the  combined  logging  camp  and  sawmill  consists  only 
of  the  production  of  lumber,  their  final  product  The 
transfer  of  logs  from  one  departmoit  to  the  other  no  longer 
i^jpears.  This  transfer  is  like  the  taking  of  money  from 
one  pocket  and  putting  it  into  another  —  a  fact  which 
would  be  particularly  evident  in  case  the  loggmg  camp  and 
sawmill  were  combined  under  the  same  management. 

Extending  the  same  principles  to  the  entire  series,  we  have 
the  accoimts  as  given  in  the  table  on  the  preceding  page. 

In  this  table  we  may  successively  cancel  each  pair  of 
itons  constituting  an  mteracti(m.  An  item  on  the  left  is 
the  positive  side  of  an  interaction  of  which  the  item  on  the 
right  in  the  line  next  below  is  the  negative  side.  Thus,  as 
previously,  the  $50,000  in  the  first  line  on  the  left  cancels  the 
$50,000  in  the  second  line  on  the  rig^t.  Similaily,  the  two 
items  of  $60,000  cancel  in  the  two  lines  next  below,  to  the 
right  and  left,  respectively.  If  we  stop  after  the  first  two 
cancellations,  thus  restricting  the  accoimt  to  the  first  three 
horizontal  lines  of  the  taUe,  we  shall  find  that  the  net  in- 
come from  logging  camp,  sawmill,  and  lumber  yard  consists 
only  of  the  production  of  retail  lumber,  worth  $70,000;  it 
includes  neither  the  transfer  of  logs  from  the  camp  to  the  mill 
Ota  the  transfer  of  lumber  ham  the  mill  to  the  yard.  In 
like  manner,  if  we  proceed  one  stage  further, ».«.,  if  we  stop 
our  cancellations  at  the  end  of  the  first  three  interactions, 
the  production  of  retail  lumber  no  longer  appears  as  an  ele- 
ment of  income ;  andao<m,stq>l^stq>  to  theaid,tirtientlie 
only  surviving  item  will  be  the  "  wear  "  of  the  suits. 

It  is,  of  course,  true  that  in  any  actual  accounts  th«e  will 
be  other  items  besides  those  wMch  have  been  exhibited  in 
this  simile,  dudnUke  faahkm.  Woe  it  worth  wldle,  we 
might  insert  these  additional  entries  of  income  and  outgo 
elements.  Most  of  them  would  likewise  consist  of  the  posi- 
tive or  the  negative  side  of  interactions ;  and  if  we  were  to 


88 


nniBiiTAsy  pumoplis  or  ioonomics  (Ckat.v 


introdun  thdr  respective  mates,  the  opposite  a^ects  <A  the 

same  interactions,  it  would  be  necessary  to  include  the 
accounts  of  still  other  instruments.  If  we  should  follow 
up  all  such  leads,  we  should  soon  have,  instead  of  the  simple 
chain  rqnesoited  in  the  table,  an  intricate  network  re- 
lated accoimts ;  but  the  same  principle  of  the  interacticm  as 
a  self-effacing  element  would  continue  to  apply. 

§  6.  Rrriimimiy  Results  of  Combining  these  Income 

Accounts 

The  table  given  will  throw  light  on  the  question:  Of 
ydat  does  income  consist?  or,  to  be  more  definite:  Of 
idiat  does  the  income  from  a  particular  group  of  capital- 
goods  consist?  Whether  the  yielding  ri  logs  by  the  logging 
camp  to  the  sawmill  is  income  or  not  depends  upon  what 
oqpital  we  are  including.  It  is  income  with  respect  to  the 
first  link  of  capital  in  our  series  (the  logging  camp) ;  it  is 
not  income  with  respect  to  the  first  two  links  (the  logging 
camp  and  the  sawmill  taken  together),  but  merely  a  self- 
canceling  interaction  between  the  two.  Likewise  the  use 
of  the  warehouse  is  income  with  respect  to  the  first  four 
links  of  capital,  but  is  not  income  with  respect  to  the  first 
five  links. 

We  see,  therefore,  that  in  redconing  up  the  income  from 
any  group  of  capital  we  may  as  well  omit  all  Intnactkms 
taking  place  ivithin  it,  and  confine  ourselves  to  the  outer 
fringe  of  services  performed  by  the  group  as  a  whole.  As 
tht  group  is  enlarged,  this  particular  outer  fringe  disappears 
by  b.^ing  joined  to  the  next  part  oi  the  economic  fiilMtk,  and 
another  fringe  still  more  remote  appears.  To  answer  the 
question  whether  any  particuhi  item  is  or  is  not  income — 
as,  f<Nr  instance,  the  question,  "  Is  sawing  lumber  income  ?  " 
—we  must  first  ask,  Income  from  wkatt"  Inonne  ii 
iJways  relative  to  its  source. 

Contrasting  the  method  of  couples  with  the  method  of 


Sac.  6  OOMBININO  nOOIII  AOOOOIRS 


89 


balances,  we  may  say  that  the  method  of  couples  is  useful 
in  showing  of  what  elements  income  consists  in  any  given 
case.  Hw  method  of  balances,  on  the  other  hand,  is  useful 
in  exhibiting  the  amount  of  income  contributed  from  each 
capital  source.  The  two  methods,  as  applied  to  the  ezanqde 
just  given,  are  as  follows :  — 

(Sumniuised  from  Tabk  oa  p.  86) 
METHOD  OF  BALANCES 


Catoal  Income 

Outgo 

Net  Income 

%  50,00c 

$  50,000 

$  50.000 

60,000 

10,000 

Lumber  yard  

70,000 

60,000 

xo,ooe 

80,000 

70,000 

10,000 

Stock  of  cloth  in  warehouse 

90,000 

80,000 

10,000 

Stock  of  cloth  of  tailor  .  . 

500,000 

90,000 

410,000 

StxAcida/OuacicaalUmen 

600,000 

500,000 

100,000 

$600,000 

METHOD  OF  COUPLES 


The  two  methods  —  balances  and  couple  —  show  Uie 
tame  final  result  ($600,000),  but  fnnn  different  points  ol 
view.  By  mcara  of  the  method  of  balaaoes  we  are  ensiled 


90      sLnuMTAiy  psnemn  op  boohomics  (CkAr.v 

to  see  that,  of  this  $600,000,  the  part  contributed  by  the 
logging  camp  is  $50,000,  that  contributed  by  the  sawmill, 
$10,000,  and  so  on.  By  n^ans  of  the  method  of  cotq^es, 
we  are  enabled  to  see  that,  canceling  by  the  oUique  lines, 
we  have  left  but  one  item,  $600,000,  representing  the 

"  wear"  of  the  suits.  Thus  the  entire  $600,000  consists  oj 
the  use  or  "wear"  of  the  suits,  although  five-sixths  of  it  \a 
contributed  by  other  kinds  of  capital  than  the  stock  of 
clothes  of  customers.  Combining  the  results  of  both  meth- 
ods, we  may  state  that  the  total  net  income  from  the  speci- 
fied group  of  instnmients  consists  of  $600,000  worth  <A 

"wear  "  of  suits,  and  that  this  is  due  partly  to  the  stock  of 
clothes  and  partly  to  other  capital.  Of  course  our  table 
does  not  give  all  the  capital  to  which  the  wear  of  the  suits 
is  indebted.  We  have,  as  akeady  noted,  omitted,  fw  the 
sake  of  simplicity,  all  items  of  cost  which  do  not  belong 
to  our  chosen  series.  But  the  inclusion  of  other  items, 
yAiSSLt  it  complicates  the  accounts,  does  not  change  the 
principle  of  cancdlatitML  It  merdy  introduces  othar  ffc*tn« 
of  iatetacticMis. 

§7-  AaalegiM  with  Capital  Accotmting 

The  two  nwthods  corresqxmd  in  a  genonl  way  to  the  two 
methods  for  canceling  liabilities  and  assets  in  ca{»tal  ac> 
ommts.  Applied  to  capita],  the  method  of  balances  gave, 
it  will  be  remembered,  the  amount  of  capital  belonging  to 
each  individual;  the  method  of  couples  showed  of  yAaX 
elements  the  total  capital  consists.  Similarly,  applied  to 
income,  the  method  of  balances  shows  what  share  of  the 
resulting  income  is  contributed  by  any  articles  or  groups  of 
articles  of  ca{»tid;  while  the  method  of  coiq>les  s1k>ws 
wherein  that  resulting  income  consists. 

Let  us  consider  for  a  moment  the  method  of  couples  as 
applied  to  the  two  sorts  of  accounts.  In  capital  accounts 
the  self-effadng  {teii»  were  dtits;  in  hioome  accounts  tiw 
M^-cffacing  items  were  inknuHoHS.   Ihese  conoepls— 


Me.  a  OOHBDBMO  IMXait  AOOOOIRI 


debts  and  interactions  —  supply  the  key  for  the  mutual 
cancellations  between  accounts.  A  dd>t  is  both  positive 
and  negative  and  so  is  self-cancding.  An  interaction  is 
likewise  both  positive  and  negative  and  so  self-canceling. 
A  realization  of  the  two-f aa  d  nature  of  debts  he^  us  to 
avoid  the  omfusions  of  doutie  counting  in  capital  accounts 
nn^  double  tazatkm ;  a  realization  of  the  two-faced  native 
of  interactions  saves  the  omfusions  of  double  counting  in 
income  accoimts. 

It  is  important  here  to  observe  of  bioome,  as  was  pie* 
viously  observed  of  capital  (Chapter  III,  §  8),  that  the  self- 
effacement  of  the  self-effacing  elements  (interactions  in 
the  case  of  income)  does  not  mean  that  the  total  income 
would  be  just  the  same  if  thoe  were  no  interactions.  On 
the  contrary,  the  om^ence  of  interactions  —  the  opaations 
of  industry  and  commerce  —  are  essential  steps  toward  the 
final  goal  of  imcanceled  income  to  which  they  lead. 
Without  them  the  final  uncanceled  income  would  be  very 
much  less  and  often  nonexistent.  Debts  mean  subdivided 
ownership  of  capital  and  interactions  mean  subdivided 
steps  in  income.  They  make  capital  and  income  respec- 
tively more  abundant  and  effective. 

We  may  iliustrate  what  has  been  said  by  two  simple 
examples.  If  a  man  owns  a  piece  of  real  estate  worth 
fio,ooo  and  mortgages  it  for  $6000,  this  debt  must  be 
entered  in  his  accounts  as  a  liability  of  I6000  and  in  the 
accounts  ol  the  mortgagee  as  an  asset  of  $6000.  Conse- 
quently, as  between  the  two  men  the  item  cancels  out. 
But  thfe  does  not  mean  that  the  mortgage  is  of  no  ac- 
count. It  does  not  mean  that  the  two  men  would  be  fmt 
as  wdl  off  a  thae  were  no  mortgage.  If  we  should  force 
them  against  their  will  to  cancel  the  debt,  it  would  be  an 
inconvenience  to  both.  The  owner  would  find  it  difficult 
to  make  the  payment  and  the  mortgagee  would  have  ^ 
fauxmvenienoe  of  finding  another  investment  for  the  $6000 
retncned  to  him.   The  buomw^mot  to  tlie  omm 


93         nXMXNTAMY  ntDICIK,ES  OV  BCOMOMICS     (Cbat.  V 

be  so  great  that  he  would  be  forced  to  sell  his  land  per- 
haps at  a  sacrifice  below  the  $10,000  which  is  its  real 
worth,  while  if  the  mortgage  is  allowed  to  stand,  he  might 
not  be  willing  to  sell  even  for  a  sum  conaidenbly  above 
the  $10,000.  The  inconvenioice  to  the  mortgagee  might 
be  less. 

We  find  the  same  thing  true  of  intmcticms.  A  book- 
seller who  sells  $2oco  worth  of  books  in  the  course  of  a 
year  credits  his  business  with  this  sum  while  his  customers 
debit  their  libraries  with  $2000  worth  of  books.  These 
entries  are  evidently  oarect  accounting,  and  the  receipts 
of  the  bookseller  and  the  expenditures  of  his  custmners 
exactly  oflFset  each  other.  But  this  does  not  mean  that 
the  transactions  are  of  no  account.  Without  them  the 
bookseller  would  find  a  great  accumulation  of  books  which 
would  be  entirely  useless  to  him  while  his  customers  would 
be  deprived  of  the  satisfaction  of  reading  these  books.  If 
we  could  force  the  reversal  of  the  normal  process  and 
make  the  customers  resdl  their  books  to  the  dealer,  there 
would  be  an  obvious  loss  to  both  parties.  The  dealer 
would  refuse  to  take  them  except  at  a  price  far  below  the 
$2000,  while  their  possessors  would  not  be  willing  to  sell 
them  unless  for  more  than  $3000. 

§  8.  Double  Bntiy  in  Acconati  of  Fictitioua  PttMu 

We  have  now  foUowec  tu  cancellations  to  whidi  inter- 
actions lead,  wb  r  they  ]  -  jiteractions  of  exchange  or  of 
production.  1  ,  case  c  .  .  nge,  however,  needs  further 
consideration.  Since  evt:^  exchange  consists  of  two  trans- 
fers, and  every  transfer  of  two  items,  a  credit  and  a  debit, 
the  exchange  evidently  consists  of  four  items  in  all,  two  of 
whici  are  credits  and  two  of  which  are  debits.  These  four 
may  be  paired  off  in  two  ways,  only  one  of  which  has  thus  far 
been  mentioned.  Thqr  stand,  as  it  were,  at  the  four  comers 
ol  a  square,  as  in  the  sdieme  given  in  (4. 


8m.«  COMBUiIKO  IMOOIII  AOOODIR* 


93 


The  two  transfers  bito  whidi  any  exchange  may  be  re- 
solved are  represented  by  the  second  and  third  columns  of 
that  scheme.  The  second  column  indicates  that  a  $2 
article  has  been  transferred  from  the  stock  of  the  seller  to 
that  of  the  buyer,  being,  therefore,  credited  to  the  one  and 
debited  to  the  other ;  the  third  column  indicates  that  $2 
of  money  has  been  transferred  from  the  stock  of  cash  of 
the  buyer  to  that  of  the  seller  and  credited  and  debited 
accordingly.  But  this  same  exchange  may  also  be  resolved 
into  two  pairs  of  items  represented  by  the  two  horizontal 
lines  of  the  scheme.  The  upper  line  indicates  that  the 
seller  has  exchanged  goods  for  cash  crediting  his  gpods 
with  the  sale  and  debitbg  his  cash;  the  lower  line  indi- 
cates tl»  revorse  conditicms  for  the  buyer. 

Every  exchange,  then,  consists  of  four  items,  and  may  be 
resolved  either  into  two  transfers  (one  for  each  good  ex- 
changed) or  into  two  traioactions  (one  k«  each  persom 
ecchanging  those  goods). 

These  latter  items,  namely,  transactions  represented  by 
the  horizontal  lines,  we  mxist  now  consider  more  fully. 
Each  of  the  previous  inonne  accounts  is  an  account  of  ior 
come  flowing  from  a  specified  good  owned,  not  of  the  entire 
income  received  by  a  given  person  as  owner.  But  it  is  easy 
now  to  form  the  income  accounts  of  any  given  person,  i.e., 
the  income  and  outgo  of  all  his  assets  and  liabiHties,  simply 
by  combining  in  each  case,  by  the  method  of  balances,  the 
accounts  of  all  his  items  of  property  (whether  assets  or  lia- 
bilities). We  must  distinguifib,  however,  the  accounts  of 
real  and  of  fictitious  penom.  We  beghi  with  the  income 
accoimt  of  a  fictitbm  perscm. 

The  following  accotmt  represents  the  entries  during  a  given 
year  for  a  dry  goods  company.  In  this  account  we  observe 
that  every  item  cm  die  iinome  tSdt  k  bdimced  by  .  a  eqmd 
and  qppoiite  item  on  the  outgo  ade.  All  items  thus  paid 
are  represented  by  the  same  letters,  the  capitals  being 
used  for  positive  items  and  the  small  letters  for  native. 


94  KLEMENTAXY  PRINCIFLS8  QT  XCOMOUICS  (ClAV.V 


DfOQICS  AND  OUTGO  OF  A  DRY  GOODS  COMPANY 

FOR  1910 


OanxAt  Souks 

iHOcaa 

Odtoo 

Stodc  of  goods 

By  goods  sold  $10,000  A 

To  goods  bought  $5,000  b 

Cash  .... 

By  cash  taken  out 
for  purchaaes  $5,000  B 
for  profits      $2,000  C 

To  cash  received 

from  sales  .   .  $10,000  0 

Capital  Stock  . 
(a  liability) 

To  dhridads     $3,000  e 

The  rule  we  have  learned  in  Chapter  IV  for  making  com- 
plete income  accounts  is  to  start  with  the  capital  account 
taking  each  item  of  assets  and  each  item  of  liabiUties,  and  to 
entor  for  each  item  of  either  kind  aU  the  items  of  income  to 
which  they  give  rise,  plus  or  minus,  as  the  case  may  be. 
For  simplicity,  it  is  here  assumed  t'^     instead  of  fifty  or  one 
hundred  diflfercnt  items  of  capital,       are  only  three  items- 
namely,  the  stock  of  goods,  the  stoc*  01  cash*,  and  the  "  ami- 
tal  stock,"  which  is  "  negative  capital."  The  stock  of  goods 
yields  |io,ooo  worth  of  sales.   But,  on  the  other  hand  it 
coats  $5000  to  replenish  this  stock  of  goods.   Therefore  it  is 
credited  with  a  plus  item  of  $10,000,  and  debited  with  a 
mmus  item  of  $5000.   The  student  will  notice,  moreover 
that  each  of  these  iter-,  is  entered  twice,  once  on  each  side! 
Tlie  douUy  entered  items  may  be  mutually  canceled.  A 
cancels  with  a ;  that  is,  though  the  stock  of  goods  &  credited 
with  bringing  in  $10,000  (A)  in  cash,  the  cash  drawer  must 
be  debited  with  the  $xo,ooo  (o)  which  it  swaUows  up.  Like- 
wise the  stock  of  goods  costs  $5000  (b),  which  must  therefore 
be  debited  to  it;  but  the  cash  drawer  has  to  supply  this 
ISooo  Mid  is  therefore  credited  with  $5000  (B),  so  that  items 
B  and  b  cancel.   Finally,  when  the  profits  are  paid,  they 
also  cooBe  out  of  the  caah  drawer,  and  the  cash  drawer  is 


Sec  «|  COMBININO  DfOOia  AOOOUIRS 


95 


credited  with  exactly  that  amount,  laooo  (C) ;  while  the 
"  capital  stock  "  is  debited  with  that  amount  as  a  cost  (c). 
So  we  see  that  all  six  items  caned  one  aaote  in  pairs. 
The  two  sides  of  the  account  <d  siidi  a  fictitious  person 
necessarily  balance.  Even  if  the  comi>any  accumulates  its 
profit  instead  of  paying  it  in  dividends  to  the  shareholders, 
the  two  sides  of  its  account  still  balance ;  for,  as  has  been 
seen,  aO  mcmey  received  is  not  only  credited  to  the  capital 
source  which  brought  it  in,  but  is  also  debited  to  the  cash 
account.  Here,  for  instance,  the  $2000  item  (doubly  entered 
as  C  and  c)  would  merely  be  omftted.  Thcte  would  be  no 
laooo  dividends,  but  the  cash  dnwer  would  be  faooo 
fuller. 

(9.  Double  Bntiy  in  Accounts  of  Real  Persons 

In  the  case  c'  real  persons,  however,  the  two  sides  do  not 
balance,  for  the  accounts  do  not  then  consist  solely  of  double 
entries.  To  show  this,  let  us  consider  the  accounts  of  a 
real  perscm  as  given  in  the  nest  taUe.  In  these  accounts,  as 
in  the  previous  ones,  both  of  which  are  much  simplified, 
we  have  indicated  the  like  items  on  opposite  sides  by  like 
letters,  the  positive  items  being  represented  by  capitals  and 
the  nqiative  by  small  letters.  We  observe  that,  as  in  the 
accounts  of  the  previous  company,  many  of  the  items  will 
"  pair."  But,  xmlike  the  company's  accounts,  the  present 
accounts  contain  a  residue  of  items  which  will  not  pair. 
The  letters  rqweseniting  these  unpaired  itenn  are  designated 
on  the  next  page  by  bemg  inclosed  in  square  brackets. 
They  show  that  [B]  and  [C]  —  the  shelter  of  the  house,  and 
the  use  of  food  —  constitute  a  kind  of  income  whidi  does 
not  vppeax  elsewhere  as  ou^^. 

When  studying  the  accoxmts  of  goods  owned,  we  fovmd  in 
considering  the  chain  of  productive  services  of  a  lumber 
camp,  etc.,  that  there  always  remains  some  outer  fringe  <^ 
uncancded  incmne.  We  have  now  reached  this  same  kind 


96  Euaa 

niTAiy  nniciKBi  ot  wa 

INOOME  AND  OUTGO  OF  A  REAL  PI 

YEAR  1910 

CR808f  fOK  TBI 

CAffixAi  Soma 

iMooia 

Odtoo 

Sto^MMlboadi 

By  receipt  of  money  from 
ttodu  and  bonds  faooo  A 

To  money  eqMBdad 
for  stocks  and 
bonds       Scm  d 

LeuK  right  .  . 

By  shelter  .  .  .  $ioo[B] 

To    money  rent 
paid   .   .  Iioo  « 

Food  .... 

By  use  of  food  .   .  $150  [Cj 

To  mon^  cost  of 
food  .  .  $150  / 

"CMfc"  .   .  . 

By  ctah  taken  out  for 
^odts  and  boncb  Ijoe  D 

By  payment  for  rent  |ioo  E 
By  payment  for  food  |iso  F 

To  receipt  of  money 
tnm  itodn  and 
bonds  .  laooo  a 

To     receipt  <A 
BMoqr  tat  tvQik 
dona  .  faeeof 

Salf    .  .  .  . 

By  receipt  of  money  for  woilc 
done    .   .  .  .'$3000(7 

Uacaaoeied  items :  Shelter       .  .  |ioo 
Use  of  food  [q  .  $150 
Total  ttncancded  income    ....  $350 


of  outer  fringe  in  studying  ♦he  accounts  of  cwners,  provided 
they  are  real  persons.  This  outer  fringe  consists  of  the 
final  benefits  of  their  goods.  All  other  items  are  merely 
interactkms  pteptaatxay  to  such  final  boiefits,  and  jmss 
from  one  category  of  capital  to  another.  Thus  the  io- 
come  from  investments,  being  paid  into  the  cash  drawer,  is 
outgo  with  re^ct  to  the  drawer ;  the  drawer  yields  income 
by  paying  for  stocks  and  bonds,  food,  ^c,  but  in  each  case 
the  same  item  enters  as  outgo  with  resptxt  to  these  or  other 


Sac.«|  COMBINING  INCOMB  ACCOUNTS 


97 


of  ai|»tal.   In  all  thew  om  the  indhridnal  fB» 

ceives  no  income  which  is  not  at  the  same  time  outgo.  It 
is  only  as  he  receives  shelter  from  the  bouse,  consumes  food, 
wears  clothes,  or  uses  fumitture,  or  some  other  artide,  that 
he  receives  income.  And  these  final  ben^ts  are,  <rf  ooune, 
the  end  andgoalof  aUthepceoedingeoonmnicproceiMaaBd 
activities. 

We  have  thus  reached  what  may  be  called  the  stage  of 
find  ot  tt^oyaik  inoHne.  This  b  the  stage  at  which  wealth 
at  last  acts  upon  the  person  of  the  recipient.  This  final 
income  is  that  of  which  the  economist  is  in  search,  and  is 
that  which  the  ordinary  statistics  of  workiugmen's  expen- 
ditures rqwesent.  It  has  been  made  clear  that,  in  the 
final  net  income  which  we  derive  from  wealth,  all  interactions 
between  different  articles  of  wealth  drop  out — all  the  trans- 
formations of  production,  such  as  the  operations  of  mining, 
agriculture,  and  industry,  all  the  operations  of  transportation, 
and  all  transfers  and  exchanges  in  business.  For  in  all  such 
cases  the  debits  and  credits  inevitably  occur  in  pairs  of  equal 
and  opposite  items.  Each  pair  consists  of  the  opposite  beets 
of  the  same  interaction.  The  only  ite  ms  which  survive  are 
the  final  personal  uses  of  wealth.  The  chief  classes  of  such 
uses  or  benefits  are  those  of  nourishment,  shelter,  and 
clothing. 

Havhig  reached  the  action  of  wealth  on  the  human 
body,  we  may,  as  students  of  economics,  be  content  to 
stop.  But,  theoretically,  there  is  one  step  more  before 
the  proces  of  tracing  a  aoies  of  interacticms  has  reached 
its  final  goal.  Indeed,  no  boiefits  outside  ourselves 
are  of  significance  to  us  except  as  they  lead  to  feelings 
trithin  our  minds.  And  if  we  r^ard  the  human  body  in 
the  same  Hf^t  in  which  we  have  regarded  artkdes  of 
wealtii,  we  omid  extend  our  accounts  by  conceiving  wealth 
as  interacting  with  the  human  body.  We  would  then 
debit  the  human  body  with  the  nourishment,  shelter,  pro- 
tectkm  bom  otdd,  etc.,  which  it  receives  from  food,  dwellings. 


98       nmiMTAiY  niMcmst  or  lOowoMiat  [CiAr.v 

clothing,  etc.,  and  credit  it  with  the  satisfactions  experienced 
through  the  brain,  i.e.,  the  feelings  of  enjoyment  of  food  or 
avoklaaoe  of  pam,  etc.  As,  hoivever,  we  have  in  general, 
in  this  textbook,  limited  the  concept  of  wealth  to  its  nar* 
rowtr  definition,  excluding  free  human  beings,  we  shall  not 
attempt  to  follow  these  transformations  of  income  after 
they  leadi  the  persfm  of  the  owner.  Usually  the  mental 
satisfactions  follow  so  closely  after  the  physical  effects  of 
wealth  on  the  human  body  that  practically  we  scarcely 
need  to  dbtinguish  between  those  physical  effects  and  the 
resulting  satisfactions.  Hereafter  we  shall  qpeak  of  satis- 
factions of  food,  shelter,  clothing,  etc.,  as  if  they  fkmcd 
directly  from  these  external  objects. 

§  ZD.  Ultimate  Coita  and  Income 

We  have  now  reached  a  convenient  place  at  which  to 
emphasize  a  point  of  great  importance,  but  one  which  is 
s^iom  understood;  namely,  that  most  of  what  is  called 
"  cost  of  production  "  is,  in  the  last  analysis,  not  cost  at  alL 
We  have  found,  in  using  the  method  of  couples,  that  every 
item  of  moi  ey  cost  is  also  an  item  of  income,  and  that  in 
the  final  total  no  smk  Hems  sunke  eancettaiUm.  It  costi 
the  baker  flour  to  produce  bread ;  but  the  cost  of  flour  to 
the  baker  is  a  benefit  to  the  miller.  To  society  as  a 
whole,  on  the  other  hand,  it  is  neither  cost  nor  benefit, 
Imt  a  mere  interaction. 

As  has  been  said,  in  the  last  analysis,  payments  of 
wages,  interest,  rent,  or  any  other  payments  from  one  mem- 
ber of  society  to  another,  are  not  costs  to  society  as  a  whole. 
This  fact  slMnhi  now  be  dear;  yet  it  is  commonly  over- 
looked. When  people  talk  of  thie  coat  <A  producing  coal  or 
wheat,  they  usually  think  of  money  payments.  The  items 
called  costs  of  production  are  mostly  payments  from  per- 
ion  to  ftntm,  m  interactions,  at  va^NU  stages  of  produo- 
tion.  We  have  seen  that  each  such  item  is  t»o-&oe4  lad, 


•m.i«| 


oomDmio  mooMB  acoovnii 


99 


in  the  final  total,  wipes  itself  off  the  slate.  The  only  ultir 
mate  item  of  cost  is  tabor  cost  or  efforts;  that  is,  all  the 
npff^i— of  an  WMkifaaUe  nature  whidi  aie  ondergrae 

in  order  that  experiences  of  a  desirable  nature  may  be 
secured.  We  may  conclude,  therefore,  that  in  the  last 
analysis  income  consists  of  satisfactions  and  outgo  of  effort 
to  MCine  satirfactkmt.  Between  efforts  and  satisfactkoa 

may  intervene  innumerable  interactions,  but  they  all  must 
cancel  out  in  the  end.  They  are  merely  the  machinery 
connecting  the  efforts  and  satisfactions.  At  bottom,  eco* 
Hftnrfff  treats  sfanply  of  efforts  and  satisfactions.  This  k 
evident  in  the  case  of  an  isolated  individual  like  Robinson 
Crusoe,  who  handles  no  money ;  but  it  is  equally  true  of 
the  most  highly  organized  society,  though  olMcured  by  the 
fact  that  each  member  of  such  a  sodety  talks  and  thinks 
in  terms  of  money. 

In  the  light  of  the  foregoing  principles  we  are  now  in  a 
position  to  take  a  bird's-eye  view  of  the  income  of  any  coun- 
try. Unfortunatdy,  there  are  no  available  atatiatics  for 
income  in  the  United  States.  We  can  only  guess  as  to  what 
the  amount  of  it  may  be.  Possibly  $30,000,000,000  worth 
of  finft]  income  is  annually  enjoyed  in  the  United  States, 
of  which  about  one  third  is  in  the  form  of  nourishment  or 
food  'OSes,  about  one  sixth  m  the  form  of  shelter,  and 
about  one  eighth  in  the  form  of  clothing.  These  and 
the  other  items  of  the  direct  uses  of  wealth  constituto  the 
real  inonne  of  society.  In  other  words,  our  real  income  ii 
what  b  often  called  our  "  living."  Money-income,  as  we 
have  seen,  is  not  real  income,  but  is  converted  or  spent  for 
real  income  in  what  we  call  our  "  bread  and  butter," 
iHddi,  more  exactly  expressed,  means  the  use  of  our 
"  bread  and  butter  "  and  of  the  other  goods  contributing 
direct  benefits  to  human  beings.  These  uses  include  the 
necessaries,  comforts,  luxuries,  and  amusements  of  life. 
TlMSie  are  what  make  up  our  "living."  The  more  money 
wagea  it  costs  to  acquire  a  given  amount  of  real  wa^ 


XOO         ELEMENTARY  PRINCIPLES  OF  ECONOMICS  [Cbap.V 

the  higher  the  "cost  of  living"  of  which  we  hear  so  much 
to-day.  The  money  which  the  workman  is  paid  in  wages 
is  not  his  real  wages,  but  only  his  nominal  wages.  T!:c 
real  wages  are  the  workman's  Uving  for  which  that  money 
is  spent.  Money  payments,  as  we  have  seen,  ca:  eel 
themselves  out  when  we  take  a  view  of  the  whole,  for  f  r  v 
are  not  only  receipts,  but  also  payments.  They  there- 
fore disappear,  just  as  in  our  view  of  capital  the  bonds 
and  stocks  disappear,  being  not  only  assets,  but  also  liabili- 
ties. And  in  exactly  the  same  way  the  oj)erations  of  pro- 
duction and  transportation  cancel  themselves  out  in  the 
total  production  of  the  farms.  The  ten  billions  of  dollars' 
worth  of  farm  products,  for  instance,  which  we  are  produc- 
ing are  not  a  part  of  the  income  of  the  country  to  be  added 
to  our  consumption  of  food,  etc.,  any  more  than  they  are 
a  part  of  the  costs  of  the  country.  To  the  farmer  they 
represent  income,  but  to  those  who  buy  of  the  farmer  they 
represent  outgo,  while  to  the  country  as  a  whole  they  rep- 
resent neither  income  nor  outgo.  By  the  method  of  couples 
they  vanish,  and  in  their  stead  we  have  the  consumption  of 
bread  and  the  other  finished  products  which  originated  with 
the  farm;  and  should  we,  as  is  sonietimes  erroneously 
done,  try  to  add  together  the  value  of  these  finished  products 
and  the  value  of  the  farm  products,  we  should  be  guilty  of 
double  counting,  as  would  be  the  case  in  capital  accoxmting 
if  we  should  add  the  value  of  mortgages  to  the  value  of 
real  estate. 

The  method  of  couples  thus  provides  us  with  a  view  of  red 
income,  making  clear  what  it  consists  of  and  what  it  does 
not  consist  of.  If,  however,  we  wish  to  know  the  extent  to 
which  various  agencies  have  produced  tJiis  income,  we  must 
look  at  the  matta  from  the  standpoint  of  the  method  of 
balances.  From  this  standpoint,  perhaps  three  quarters  of 
the  total  income  enjoyed  in  the  country  is  produced  by 
human  beings,  the  workers  of  society,  the  remainder  being 
fmxiuced  by  capital  in  its  narrower  sense.    Of  this  capi- 


Sec.  loj  COMBINING  INCOME  ACCOUNTS  lOI 

tal  that  which  produces  the  greater  part  of  our  income  is 
land,  but  some  of  our  income  must  also  be  credited  to 
railways,  ships,  factories,  shops,  dwellings,  etc.  It  does 
not  matter  whether  the  capital  is  or  is  not  itsdf  the  prod- 
uct of  other  capital,  of  human  beings,  or  of  nature. 
There  will  usually  be  a  net  income  to  be  credited  opposite 
each  kind  of  capital,  as  shown  in  the  table  of  the  Method 
of  Balances  in  §  6. 


CHAPTER  VI 


CAPTTALIZINO  INCOICE 

§  I.  The  Link  between  Capital  and  Income 

Wx  have  now  learned  what  capital  and  income  are,  and 
how  each  is  measured.  We  have  seen  that  the  term  "  capi- 
tal"  is  not  to  be  confined  to  any  particular  part  or  kind  of 
wealth,  but  that  it  ^plies  to  any  or  all  wealth  existing  at  a 
given  instant  of  time,  or  to  property  rights  in  that  wealth, 
or  to  the  values  of  that  wealth  or  of  those  property  rights. 
We  have  seen  that  income  is  not  restricted  to  money- 
income,  but  that  it  consists  of  all  kinds  of  benefits  of  Trealth. 
We  have  seen  that,  like  capital,  income  may  be  measured 
either  by  the  mere  quantity  of  the  various  benefits  or  by  the 
value  of  those  benefits.  We  have  seen  that  in  the  addition 
both  of  o^ital-value  and  of  income-value  then  are  two 
methods  available  for  canceling  positive  and  negative  items, 
called  respectively  the  "  method  of  balances "  and  the 
"  method  of  couples."  By  the  method  of  balances  the  nega- 
tive items  in  any  individual  account  are  deducted  from  the 
positive  items  in  the  same  account,  and  the  difference  ot 
"  balance  "  gives  the  net  capital  (or  income,  as  the  case 
may  be)  with  which  that  account  deals,  whether  this  net 
capital  (ot  inomie)  pertains  to  a  particular  instrumoit  or 
instruments,  or  to  all  the  property  of  a  particular  owner. 
The  method  of  couples,  on  the  other  hand,  cancels  items  in 
pairs  and  is  founded  on  the  fact  that,  as  to  capital,  every 
liability  rektioii  has  a  credit  as  wdl  at  a  d^t  side— 

IM 


Sact] 


CARTAUIOlO  niOOMI 


103 


namdy,  as  rdated  to  creditmr  and  debtcnr  respecdvdy ;  and 
that,  as  to  income,  every  interaction  is  at  once  a  benefit  and 
a  cost  —  a  benefit  occasioned  by  that  good  (or  person)  by 
which  the  event  originates;  a  cost  occasioned  by  that  good 
(or  person)  for  wMdi  it  originates. 

We  observed  that  it  is  the  method  of  couples  alone  which, 
if  fully  carried  out,  reveals  wherein  capital  and  income 
ultimately  consist.  This  method,  applied  to  capital,  gradu- 
ally oUiterates  all  partial  ri^ts,  sudi  as  stodcs  and  bonds, 
and  exposes  to  view  the  concrete  capital-wealth  of  a  com- 
munity. The  same  method  applied  to  income  obliterates 
the  "interactions"  such  as  money  payments  between 
persons,  and  exposes  to  view  an  uncanc^d  outer  frii^  ol 
benefits  and  costs.  It  leaves  simply  the  final  benefits  of  the 
wealth,  poured,  so  to  speak,  into  the  human  organism  — 
the  satidactions  and  the  efforts  of  hiunan  life. 

We  have  seen  that  cai^tal  and  inomie  are  in  many  re> 
pects  crarrdative;  that  all  capital  yields  income  and  that 
all  income  flows  from  capital  including  hiunan  beings. 

In  ^ite  ot  this  cl(^  association  between  them,  capital 
and  income  have  thus  far  been  coosideired  sefiarat^.  The 
question  now  arises :  How  can  we  calculate  the  value  of 
capital  from  that  of  income  or  vice  versa  ?  The  bridge  or 
link  between  them  is  the  rate  of  interest.  The  rate  of  interest 
b  the  ratio  between  income  and  cai^tal,  both  the  ioxxaat  and 
the  capital  being  expressed  in  money  value.  Business  men, 
therefore,  sometimes  call  the  rate  of  interest  the  "price  of 
o^ital"  or  the  "price  of  ready  money."  Suppose,  for 
instance,  that  a  merdiant  wants  a  capital  winrth  $to,ooo  and 
is  willing  to  pay  a  bank  I400  per  year  for  it  perpetually; 
then  the  price  the  merchant  pays  for  the  capital  (or  the  ratio 
betweoi  the  annual  payment  to  the  bark  and  the  capital 
received  from  it)  isl40o  +  |xo,ooo  -  or  four  per  cent, 
and  the  rate  of  interest  is,  therefore,  said  to  be  four  per  cent. 

We  may  also  define  the  rate  of  interest  as  the  premium 
on  goods  in  hand  at  one  date  in  terms  of  goods  of  the  same 


104 


iLEMiMTAfty  nmapLBs  or  icoMomcs  fOMr.vi 


kind  to  be  in  hand  one  year  lata-.  Present  and  future  goods 
seldom  exchange  at  par.  One  hundred  ddlars,  if  in  hand 
to-day,  is  worth  more  than  if  due  one  year  hence.  To-day's 
ready  money  will  always  buy  the  right  to  more  than  its  full 
value  of  next  3rear's  money.  If,  then,  $ioo  to-day  will  ex- 
change for  $104  to  be  received  one  year  hence,  the  premium 
—  or  rate  of  interest  —  is  four  per  cent.  That  is,  the  price 
of  to-day's  money  in  terms  of  next  year's  money  is  four  per 
cent  above  par;  for  I104 -1- $100  exceeds  |zoo-i-|zco  by 
jfj,  which  is  four  per  cent. 

We  have,  then,  two  definitions  of  the  rate  of  irterest, 
viz.,  "  the  price  of  capital  in  terms  of  income  "  and  "  the 
premium  which  present  goods  onnmand  over  similar  goods 
due  one  year  hence." 

But  the  two  definitions  are  quite  consistent,  and  either  defi- 
nition may  be  converted  into  the  other.  The  rates  of  interest 
in  the  two  senses  are,  in  fact,  normally  equal.  For  irstance, 
if  a  man  bonows  $100  to-day  and  agrees  to  pay  it  back  in 
one  year  with  interest  at  four  per  cent,  we  may  conceive  of 
him  as  selling  for  $100  a  perpetual  income  of  I4  a  year  — 
and  at  the  same  Hme  agremg  to  buy  it  back  for  |ioo  at  the 
end  of  one  year.  But  these  two  stipulations  —  to  sell  and 
to  buy  back  — amount  simply  to  an  exchange  of  |ioo 
to-day  for  $104  next  year  —  i.e.,  an  exchange  of  present  for 
future  money  at  four  per  cent.  Thus  the  rate  of  interest  in 
the  price  sense  becomes  equivalent  to  the  same  rate  in  the 
premium  sense.  Or.  beginning  at  the  other  end,  conversely 
if  we  suppose  $100  to-day  to  be  exchanged  for  $104  due 
one  year  hmce,  so  that  the  rate  of  interest  in  the  premium 
sense  is  four  per  cent,  we  may  suppose  that  when  the  time 
comes  to  receive  the  $104,  only  $4  of  it  is  really  kept,  the 
lioo  being  agam  exchanged  for  $104  due  the  year  follow- 
ing. If  this  process  is  repeated  indefinitely,  the  man  wiU 
continue  to  receive  simply  I4  a  year;  and  thus  the  rate  of 
interest  in  the  premium  sense  becomes  equivaloit  to  the 
same  rate  in  the  price  sense. 


Sec.  i] 


CAPITALIZING  INCOME 


J05 


By  means  of  the  rate  of  interest  we  can  evidently  translate, 
as  it  were,  present  money-value  into  its  equivalent  future 
money-value,  or  futiure  money-value  into  its  equivalent 
[NKsent  moaey-value.  To  translate  any  inesent  vAw  into 
next  year's  value,  when  interest  is  four  per  cent,  we  multiply 
this  year's  value  by  the  factor  1.04;  to  translate  any  next 
year's  value  into  this  year's  value,  we  divide  next  y.^ar's 
value  by  the  factor  1.04.  Thus  if  the  rate  of  interest  is 
four  per  cent,  $25  to-day  is  the  equivalent  of  $25  X  104  due 
one  year  hence,  $26.  Or,  vice  versa,  $26  due  one  year 
hence  is  worth  in  the  present  $26-*- 1.04,  or  $25.  Again, 
$x  due  one  year  hence  is  worth  in  the  presmt  $x  ■*■  1.04, 
or  I0.962.  In  general  we  may  obtain  the  present  worth  of 
any  sum  due  one  year  hence  by  dividing  that  sum  by  one 
plus  the  rate  of  interest.  This  latter  operation  is  what  we 
learned  in  our  schod  arithmetics  as  "  discountmg,"  by  wldch 
is  meant  finding  the  "present  worth  "  of  a  given  future  sum. 
The  rate  of  interest  is  thus  a  link  between  values  at  any 
two  points  of  time  —  a  link  by  means  of  which  we  may 
compare  values  at  any  dlffa«it  dates. 

The  rate  of  interest,  however  defined,  may  be  regarded  as 
a  species  of  price ;  but  it  is  a  very  different  species  from  any 
prices  mentioned  in  previous  chapters.  We  have  seen  that 
the  i«ice  idieat  oiables  us  to  trandate  any  given  number 
of  bushels  of  wheat  into  so  many  dollars'  worth  of  wheat ; 
and  the  prices  of  other  goods  in  like  manner,  to  translate 
their  respective  quantities  into  their  money  equivalents. 
Any  i»ioe  thus  wevn»  as  a  biMge  or  link  between  the  quan- 
tity of  any  good  and  its  value  in  some  other  good,  as  money. 
By  means  of  prices  we  can  convert  a  miscellaneous  assort- 
ment of  goods  at  any  time  into  their  money-value  for  that 
tarn  Hm,  or  convert  a  miscdhuMOUs  assortment  oi  bmefits 
occurring  through  a  period  of  time  into  their  money-value 
for  that  same  period.  By  such  prices  we  may  only  convert 
quantities  into  sinutUaneous  money-values.  We  cannot,  by 
tbem,  pus  from  one  time  to  aaother.  By  mesas,  however, 


X06        EL£M£NTASY  PRINCIPLES  OF  ECONOMICS    (Cbat.  VI 

of  that  unique  price  called  the  rate  of  interest,  we  may 
convert  the  money-values  found  for  one  time  into  their 
equivalent  at  another  time.  The  rate  of  interest  is  thus  the 
hitherto  missing  link  necessary  to  make  our  reckoning  of 
money  equivalents  universal. 

We  are  not  yet  ready  to  explain  how  the  rate  of  interest 
comes  about.  In  fact,  we  are  not  yet  ready  to  explain  how 
any  prices  come  about.  We  must,  for  the  present,  take 
the  rate  of  interest  ready-made,  as  it  were,  just  as  we  have 
taken  other  prices  ready-made.  In  the  preceding  chapters 
we  have  seen  how  to  form  capital  accounts  and  income  ac- 
counts by  assuming  the  prices  necessary  in  each  case  to  turn 
quantities  into  money-values.  We  are  now  ready,  by  as- 
suming a  rale  of  interest,  to  show  the  relations  between  these 
two  sets  of  accounts  —  i.e.,  to  turn  income  into  capital.  It 
is  worth  while,  however,  at  the  outset  to  rid  our  minds  <rf  the 
idea  that  money  is  the  one  and  only  source  of  interest,  just 
as  we  have  already  rid  our  minds  of  the  idea  that  money  is 
the  only  kind  of  wealth.  We  may,  as  we  have  seen,  express 
a  great  many  things  in  terms  of  mcmey-value  which  are  not 
themselves  money.  This  habit  leads  us  unconsciously  into 
the  fallacy  of  thinking  of  these  things  as  though  they  were 
actual  money.  If  we  question  a  man  who  says,  "  I  have 
f  xo,ooo  of  mimey  invested,  and  frcwn  it  I  get  $500  of  money 
each  year  as  interest,"  implying  a  rate  of  interest  of  five  per 
cent,  he  will  be  forced  to  admit  that  he  has  not  really  got 
$10,000  of  money  at  all,  and,  perhaps,  even  that  the  $500  of 
money  interest  whidi  he  says  he  gets  each  year  is  not  at 
first  in  money  form.  The  true  form  of  statement  is  simply 
that  he  has  a  farm  (or  other  capital-wealth)  which  yields 
crops  (or  other  products),  and  that  both  of  these  may  be 
measured  in  terms  <rf  mangsf,  the  farm  bdng  worth  $10,000 
and  the  crops  $500.  Money  need  not  enter  at  all  excei^  as 
a  matter  of  evaluating  in  bookkeeping.  Hence,  if  we  are 
car^,  we  diall  avoid  thinking  and  speaking  of  a  fund  of 
Ixo^  IMxfaidng  an  interest  of  $500,  but  will  instead 


Sw.a] 


CAPITALIZINO  INCOME 


X07 


and  apeak  <A  actual  capUalt  such  as  farms,  factories,  rail- 
VTays,  or  ships,  worth  $10,000  and  producing  actual  benefits 
(such  as  yielding  crops,  manuf  actiuing  cloth,  or  transporting 
goods)  whidi  are  wvrth  $500. 

There  is  another  confusion  to  be  carefully  avoided,  viz., 
the  confusion  between  interest  and  the  rate  of  interest.  If 
the  interest  from  $10,000  worth  of  capital  is  $500  worth  of 
benefits,  the  rate  of  interest  is  five  per  cent.  Interest  and 
the  rate  of  interest  are  as  distinct  as  value  and  price  and  in 
the  same  way. 

The  rate  of  interest,  then,  is  a  sort  of  universal  dme  price 
representing  the  terms  <m  wfaidi  men  consider  this  year's 
values  exchangeable  in  next  year's  or  future  years*  values. 
By  assuming  this  rate,  we  are  enabled  to  convert  future  values 
into  present,  and  present  values  into  future. 

f  a.  Capital  m  Dtoeonntad  Incomt 

But  although  the  rate  of  interest  may  be  used  either  for 
computing  from  present  to  future  values,  or  from  future  to 
present  values,  the  latter  process  n  far  the  more  important 
of  the  two.  Accountants,  of  course,  are  constantly  comput- 
ing in  both  directions,  for  they  have  both  sets  of  problems  to 
deal  with;  but  theprobl«n<rf  time  vahttto  whidh m^ure 
sets  us  is  that  of  translating  the  future  into  the  presmt; 
that  is,  the  problem  of  ascertaming  the  value  of  capital. 
The  value  of  capital  must  be  computed  from  the  value  of  its 
expected  future  incmne.  We  cannot  proceed  in  the  <^)oeite 
durection  and  derive  the  value  of  figure  inoome  from  the 
value  of  present  capital. 

This  statement  may  at  first  puzzle  the  student,  for  he  may 
have  thoi^t  of  inotmM  as  derived  from  capital,  aad,^  a 
sense,  this  is  true.  Income  is  derived  from  capital-goods. 
But  tiie  value  of  the  income  is  not  derived  from  the  value  of 
those  capital-goods.  Oa.  the  contrary,  the  value  of  the 
capital  is  derived  from  the  vakw  tA  the  iacaasft.  These  tf 


io8     nxMiMTAiy  ntmciFLis  or  icqnoiiics  (CftA».vi 


lations  are  shown  in  the  following  scheme  in  which  the 
wtows  represoat  the  order  of  sequence — from  capital- 
wealth  to  its  future  benefits,  from  its  benefits  to  their 
value;  and  from  their  value  back  to  c^>ital-vali» : — 

Cqittil-irwltii         »      Flow  of  benefits  QnoooM) 

Capital- vKkie       <  Income- value 

Not  unto  we  know  how  much  income  an  item  of  capital 
will  bring  us  can  we  set  any  valuation  <m  that  capital  at 
all.  It  is  true  that  the  wheat  crop  depends  on  the  land 
which  yields  it.  But  the  value  of  the  crop  does  not  depend 
on  the  value  of  the  land.  On  the  contrary,  the  value  of 
the  land  depoids  on  the  value  of  its 

The  present  worth  of  anything  is  what  men  are  willing  to 
give  for  it.  In  order  that  each  man  may  decide  what  he  is 
willing  to  give,  he  must  have :  (i)  some  idea  of  the  value  of 
the  future  benefits  his  purchase  will  bring  him,  and  (2)  some 
idea  of  the  rate  of  interest  by  which  these  future  values  may 
be  translated  into  present  values  by  discoimting. 

Wth  these  data  he  may  derive  the  value  of  any  capital 
from  the  value  of  its  incmne  by 'means  <rf  the  connecting 
link  between  them  called  the  rate  of  interest.  This  deriva- 
tion of  capital-value  from  income-value  is  called  "  capi- 
talizing" income  or  "  discounting  "  income. 

I  3.  Hm  DiMNUt  Citnre 

Let  us  assiune  that,  for  any  given  article  of  wealth  or 
pmpetty,  the  opected  mcome  is  for^own  with  certainty, 
and  that  th  3  rate  of  interest  is  also  known.  With  these  pro- 
visos, it  i  vey  easy,  by  the  use  of  the  rate  of  interest,  to 
compute  the  capital-value  of  said  wealth  or  property ;  and 
this,  whether  the  income  accrues  continuously  or  discon- 
tinuously;  whether  it  is  uniform  or  fluctuating;  whether 
the  installments  of  it  are  few  ox  infinite  in  number. 


Steal 


CAPITALUmO  XNCXniE 


We  begin  by  considerbig  the  simplest  case ;  namely,  that 
in  which  the  future  income  consists  of  a  single  item  becoming 
due  at  some  particular  time.  If,  for  instance,  one  holds  a 
property  right  by  vurtue  of  which  he  will  receive  at  the  end 
of  one  year  a  benefit  worth  $1.04,  the  present  value  of  this 
right,  if  the  rate  of  interest  is  four  per  cent,  will  be  Si.  Or  if 
the  future  benefit  one  year  hence  is  worth  $z,  its  present 
vahie  (interest  being  at  four  per  cent)  is  found,  as  we  have 
seen  in  §  i,  by  dividing  the  $1  by  the  factor  1.04.  The 
result  is  $1  -J- 1.04,  or  $0,962.  If  the  value  to  which  the 
right  entitles  the  owner  is  any  other  amount  than  |i,  its 
present  value  is  simi^  that  give.i  amount  divided  by  x.04. 
Thus  the  present  value  of  S433  due  in  oat  year  li 
$432  +  1.04,  which  is  $4iS-38- 

Let  us  now  take  a  period  of  two  years  instead  of  one.  We 
know  by  "  compound  interest "  (at  4  per  cent)  that  not  only 
will  $1  amount  to  $1.04  next  year,  but  that  this  $1.04  next 
year  will  amotmt  to  $1.04  X  1.04  or  $1,082  the  year  after, — 
in  short,  that  $1  to-day  amounts  in  two  years  to  $z  X  (1.04)' 
or  $1,082.  Conversely,  of  course,  the  sum  of  fzxiSa  due  two 
years  hence  is  worth  in  present  value  $1 .08a  -h  (z.04)',  or  $1. 
Similarly,  the  present  value  of,  let  us  say,  $1000  due  two 
years  hence  is  $1000  +  (1.04)*  or  $924.21.  We  see  then  that, 
if  interest  is  4  per  cent,  we  can,  by  tnuUipiying  by  (i.04)'i 
translate  any  pxesent  siun  into  its  equivalent  two  yean 
hence,  and  we  can,  by  dividing  by  (1.04)',  translate  any 
sum  due  two  years  hence  into  its  equivalent  present  value. 

By  the  same  reascming  it  is  easy  to  show  that  we  must 
multiply  any  sum  in  hand  to-day  by  (z.04)'  to  obtain  the 
equivalent  sum  due  three  years  hence,  and  must  divide 
any  sum  due  three  years  hence  by  (1.04)*  to  obtain  its 
presoit  value.  If  the  period  is  four  years,  we  must  multi- 
ply or  divide  by  (1.04)* ;  for  five,  by  (i.o4)»,  rtc.  For  our 
present  purposes  we  shall  need  to  apply  the  process  of  divi- 
sion by  (1.04)  or  (1.04)'  or  (I.04)^  etc. ;  for  our  chief  object 
is  to  tniislate  future  sam  into  inearat,  not  tiie  nveae. 


IXQ 


■LMfiMTAWY  raiMcivuf  ov  aooMomci  iOur.  VI 


We  my  fihutnte  this  prooen  by  a  dfaignm,  mudi  in  tlw 

same  way  as  geography  is  illustrated  by  a  map.  Curves 
sometimes  puzzle  beginners,  but  they  are  very  important 
in  economics,  and  render  the  subjects  which  they  illustrate 
so  clear  and  simple  that  the  student  should  not  fafl  to  make 
himsdf  master  of  their  use  at  the  outset. 

In  Figure  3  the  vertical  distances  measure  the  money 
and  the  horizontal  distances  measure  the  lapse  of  time. 
The  sum  of  fxco  (represented  as  bB)  is  sui^xMed  to  be 
due  at  the  beginning  of  the  year  1901.  The  problem  is 
to  find  its  value  at  the  point  of  time  represented  by  a ; 
that  is,  at  the  beginning  of  the  year  1900,  which  we 
shall  omsider  the  "  present  instant "  m  ^{dy  the  "pres- 
ent." This  discounted  value  is  aA.  If  we  draw  the  line 
BA,  its  slope  downward  from  right  to  left  pictures  the  fact 
that  a  future  sum  becomes  smaller  and  smaller  in  present 

vahie  the  longer  the  period  at 
time  involved.  This  line  BA  is 
called  the  discount  curve.  It  is 
not  a  straight  line,  but  a  line  such 
that  its'  height  at  any  point  rq>> 
resents  the  discounted  value  of 
bB  for  the  particular  instant  cor- 
responding to  that  point.  If  the 
$100  due  ih  X90X  be  discounted 
in  1900  at  four  per  cent,  its  value 
in  the  latter  date  will  be  $96.15, 
the  difference  in  value  between 
the  two  pdnts  of  time  being 
$3.85,  as  indicated  in  the  dia- 
gram, where  aC  is  equal  to  bB,  and  AC  is  the  difference 
between  aC  or  bB,  the  amount  due  in  1901,  and  aA,  the 
discoimted  value  cd  that  amount  in  X900. 

We  shall  understand  the  nature  of  this  curve  better  if, 
instead  of  taking  merely  the  interval  of  one  year,  we  con- 
sider a  knger  interval  such  as  ten  years.  This  is  represented 


70 
60 
00 
40 
•0 
CO 

10 
a 


I900  1901 

Ite.  5. 


CAPiTALiziNo  moom 


III 


in  Figure  4.  In  this  figure,  as  in  the  preceding  figure,  the 
vertical  distances  (or  "latitudes")  above  the  base  line 
represent  sums  of  money  and  the  horizontal  dbtances  (or 
"longitudes")  represent  periods  of  time.  The  curve, 
ABC  DM  is  the  discount  curve.  The  latitudes  of  these 
points  (or  their  vertical  distances  above  the  base  line,  abcdm) 
tepnaeat  the  values  of  the  same  capital-jpxxi  at  different 
iiiitants  of  time ;  and  the  longitudes  or  horizontal  distances 
between  them  ngnmat  the  intervals  of  time  between  thoee 


M 

ISO 

i  lA 

I 

la 

E 

"MO 
MO 

90 

MO 

MO 

ao 

MO 

JO 

u 

LJ 

instants.  Thus,  let  the  pobt  a  iqvesent  the  present 
instant,  say  the  b^inning  of  the  3rear  1900,  and  let  the 
longitude  interval,  aft,  represent  a  year,  say  from  the  be- 
ginning of  1900  to  the  beginning  of  1901.  Using  equal 
intervals  for  successive  years,  we  have  oA  representing  any 
capital-value  at  the  beginning  ol  the  year  xgoo,  say  $1,  ftS 
representing  its  equivalent  next  year,  say  $1.04,  cC,  the 
equivalent  two  years  hence,  and  so  on.  We  see  that  bB  is 
wbat  we  have  called  die  "  asMrant,"  lx.04,  of  aA  pot  oat 
at  inteiest  lor  one  year,  and  cC  is  tiie  "amooit "  ol  tibe  iiBW 


xxa      iLxmNTAiy  punoplxs  or  xconomics  [Ciaf.vi 

compounded  for  two  years.  Conversely  aA  represents  the 
presrat  value  in  1900,  or  discounted  value,  of  any  one  lati- 
tude <m  the  curve,  such  as  bB,  as  well  as  of  any  other,  such 
as  cC  or  dD.  The  latitude  oi  any  point  on  tiie  curve  may 
thus  be  regarded  as  the  "  amount  "  of  the  sum  represented 
by  any  preceding  latitude  or  as  the  "present  value"  of  the 
sum  represented  by  any  succeeding  latitude.  Thus,  if  the 
total  breadth  of  the  diagram  am  rq»eient8  ten  years,  we 
may  either  say  that  wAf  is  the  amount,  at  the  end  of  the 
ten  years,  of  the  present  sum  aA,  or  that  aA  is  the  "present 
value  "  of  the  future  sum,  mM,  discounted  for  ten  years. 
The  line  AM  not  only  ascends,  but  at  an  accderatii^  rate 
—  ».«.,  it  does  not  ascend  in  a  straight  Une,  but  gradually 
bends  upward,  being  continually  steeper  toward  the  ;J  ''it. 
The  slope  of  the  curve  is  due  to  the  rate  of  interest,  and 
the  greater  the  interest  in  any  given  period  of  time,  the 
moie  tte^y  will  the  curve  slope.  This  curve,  if  prolonged 
to  the  left  to  show  what  the  "  present  value  "  was  prior  to 
the  time  a,  will,  of  course,  never  reach  the  bottom  line.  It 
keepi  becoming  Iktter  and  flatter,  so  that  its  distance 
above  the  line  can  never  become  zero. 

If  there  were  no  rate  of  interest  or  if  the  rate  of  interest 
were  zero,  the  curve  would  not  slope  at  all,  but  would  be 
a  hoiisontal  line. 

S4.  Appiicatioa  to  Valuing  Instramentt  and  Knfirt^r 

The  principles  which  have  been  eipiahied  for  obtainbg 

the  present  value  of  a  single  future  sum  apply  to  many  com- 
mercial transactions,  such  as  to  t>,s  valuation  of  bank  assets, 
which  edst  largely  in  the  form  of  "  cii's  tnmt  paper,"  or  short- 
time  loans  of  other  kinds.  The  value  of  mch  a  nc^e  is  al- 
ways the  discounted  value  of  the  future  payment  to  which  it 
cn^tles  the  holder.  Similarly,  the  value  of  any  article  of 
wealth,  redeemed  iriwn  that  wealth  is  in  course  of  omstruc' 
tion,  IS  H»  present  value  oi  what  it  wiD  bring  wten  com- 


CAPRAUnNO  XMCOMB 


113 


pleted  (leM  the  pn&ent  value  of  the  cost  of  completloo). 

For  instance,  the  maker  of  an  automobile  will,  at  any  of  its 
stiiges  in  the  course  of  construction,  appraise  it  as  worth  the 
discounted  value  of  the  price  expected  for  it  when  finished 
sad  sold,  less  the  discounted  value  of  the  costs  of  construction 
■Ml  selling  which  still  remain.  Thus,  if  an  automobile  is  to 
be  sold  for  S5000  and  requires  a  year  before  this  sum  will  be 
realized,  while  it  will  cost  to  complete  a  sale  I2000,  which 
mm  tot  wbofXkMy^  we  also  assume  it  payable  at  the  end  of 
the  year,  the  present  value  of  the  automobile  will  be  the 
present  value  of  $5000  minus  $2000,  which,  at  four  per 
cent,  will  be  ($5000  —  $2000)  1.04,  or  $2884.62.  The 
dement  of  risk  sfatMild  not,  of  course,  be  overiooked ;  but 
consideration  does  not  belong  here. 
\other  application  of  these  principles  of  capitalization 
is  lu  goods  in  transit.  A  cargo  leaving  Sydney  for  Liverpool 
k  worth  the  discounted  value  of  what  it  will  bring  in  Liver- 
pool, less  the  discounted  value  of  the  cost  of  carrying  it 
there.  Another  good  example  is  a  young  forest,  which  is 
worth  the  discounted  value  of  the  lumber  it  will  ultimately 
form. 

Ordinarily,  however,  we  have  to  deal,  not  with  one  future 
sum,  but  with  a  series  of  future  sums.  A  man  who  buys  a 
bond  or  a  share  of  stock  is  really  buying  the  right  to  a  aeriet 
of  fatme  items  of  income.  But  we  can  treat  a  seiietirf  items 
of  income  by  discount  curves  in  einctly  the  tame  way  that 
we  can  treat  one  such  item. 

For  instance,  let  us  conador  a  |zoo  "  five  per  cent "  iim 
yea  bond.  SiKh  a  Ixmd  is  simply  a  promise  to  pay  I5 
each  year  for  ten  years  and  at  the  end  of  these  ten  years 
to  pay  in  addition  the  '  principal "  sum  of  $100.  The 
proUm  is  to  discover  the  present  value  of  the  bond.  Thit 
it  evidently  the  discounted  value  of  the  eleven  sums  which 
the  owner  will  receive  from  the  bond ;  in  other  words,  the 
discounted  value  of  the  "  principal,"  due  ten  years  hence, 
together  with  the  discounted  valuer  (rf  the  ten  sq)arate  in- 
I 


114     vLoimAXX  nacmxB  or  wmam  IQu».vi 

terest  payments  due  respectively  one  year,  two  yws,  three 
years,  etc.,  up  to  and  including  ten  years  from  date.  As 
we  have  just  seen  how  to  get  the  discounted  value  of  any 
one  of  these  sums,  it  is  simply  a  question  of  arithmetic  to 
calculate  them  aU  and  then  add  them  together.  Before 
we  can  perform  the  calculations,  however,  we  must  know 
what  rate  of  interest  to  use.  The  mere  fact  that  the  bond 
is  called  a  "  five  per  cent "  bond  does  not  mean  that  those 
who  buy  the  bond  will  calculate  its  present  value  to  them 
by  discounting  its  benefits  at  five  per  cent.  The  five  per 
cent  named  in  the  bond  b  called  the  nondml  rate  of  m- 
terest  It  may  or  may  not  be  the  same  as  the  rate  of 
interest  used  by  investors  in  ascertaining  the  P'fent  value 
of  the  bond.  This  latter  rate  is  called  he  rate  realiaed. 

If  the  rate  realized  happens  to  be  the  same  as  the  nomi- 
nal rate  of  interest,  i.e.,  that  named  in  bond,  the  present 
value  of  the  bond  wiU  be  par,  or  $ioo.   This  can  be  shown 
in  various  ways,  as  by  calculating  separately  all  the  eleven 
different  sums  to  which  the  bond  entitles  the  owner ;  namely, 
the  ten  interest  payments  of  $5  each  and  the  final  principal 
of  $100.   Such  a  calculat  ion  shows  that  the  present  value  of 
the  first  interest  payment  of  $5  (namely,  that  due  one  year 
hence)  is  $5    1.05,  or  $4.76 ;  that  the  present  value  of  the 
second  interest  payment  of  $5  is  $5-5- (i. 05)',  or  $4-SS; 
that  the  present  value  of  the  third  interest  payment  u 
$5  -5-  (i.o5)»,  or  $4.32 ;  that  the  present  value  of  the  fourth 
interest  payment  is  $5  +  d-OS)*.  <»         *»  and  so  on  up 
to  the  tenth,  the  present  value  of  which  would  be  $5  + 
(i  os)"  or  $3.07 .    To  this  series  must  be  added  the  present 
value  of  the  principal,  which,  being  discounted  for  ten  years, 
is  $100+  (1.05)",  or  $61.39.  The  sum  of  aU  these  wiU  be 
•♦.76  +  $4-55  +  $4-32  +         +  *3-92  +  $3-73  +  <3  55  + 
$3.38  +  $3.22  +  $3.07  +  I6X.39  -  ^  1****°* 

value  of  the  bond.    ^  ^  ,  .   .    .  • 

Another  method  of  getting  the  Mune  result  is,  beginning 
oar  cricQhtfcmat  the  time  wl«n  the  bond  falb  due  in  tl» 


Uc4 


oamamMO  ofooMB 


future,  to  proceed  backwards,  discounting  year  by  year.  It 
is  evktent  that  just  bef(»e  the  payment  of  the  bond  it  will 
be  worth  $105 ;  for  at  that  time  there  is  immediately  due 
$5  of  interest  and  $100  of  principal.   Any  time  earlier  in 
the  ninth  year,  the  value  of  the  bond  will  evidently  be 
the  discounted  value  of  this  $xoo  and  this  $5,  the  discount 
being  for  whatever  portion  of  the  year  may  be  involved. 
Just  after  the  mnth  interest  payment,  and  just  one  year  be- 
fore the  date  when  the  $105  are  due,  the  value  of  the  bond 
wiU  evidently  be  found  by  discounting  $105  for  one  year  at 
five  per  cent.  This  gives  $105  -i-  1.05,  or  |ioo.   In  other 
words,  the  value  of  the  bond  at  the  end  of  nine  years,  just 
after  the  ninth  interest  payment,  will  be  par,  or  $xoo.  The 
instant  i»eceding,  namdy,  just  before  the  ninth  interest 
payment,  the  value  of  the  bond  will  be  more  by  the  amount 
of  interest  payment,  $5.    That  is,  the  value  of  the  bond  will 
be  $105  just  before  the  ninth  interest  payment  and  $xoo  just 
after.  Thhauddendropof  $5  is  due  to  the  abstraction  of  the 
$5  of  interest.  For  this  reason,  care  is  always  taken  by 
brokers  at  or  near  the  time  of  interest  payments  to  specify 
whether  the  bond  is  to  be  sold  with  the  interest  payment 
or  without  it,  the  higgler  price  being  paid  if  the  bond  is 
bought  before  the  interest  has  been  abstracted. 

Thus,  the  instant  before  the  ninth  payment  of  interest 
the  bond  is  worth  $105,  just  as  was  the  case  the  instant  before 
the  tenth  and  last  paymnt.  By  the  same  reasoning,  there- 
f<we,  its  value  one  year  earlier,  just  after  the  eighth  interest 
payment,  will  be  $100  and  just  before,  $105.  In  this  manner 
we  may  proceed  year  by  year  back  to  the  present,  finding 
that  the  value  of  the  bond  wiS  be  $xoo  just  after  any  interest 
paymrat  and  $105  just  before.  Its  value  will  therefore  be 
lioo  just  after  the  first  interest  payment,  which  occurs  ant  , 
year  hence,  and  $105  just  before  that  payment.  The  vrfue 
of  tUa  $105  at  the  pieaent  hutant  wiB  therefore  be  $xoo. 

Reviewing  these  figures  in  the  reverse  order,  we  see  that 
tiMi  mhie  of  the  bond  begins  at  $xoo,  aaceudi  to  $105  (me 


1X6       SLBMENTARY  FBINCIPUS  OF  I0(»IQiaC8    [Our.  VI 


year  from  date,  then  drops  suddenly  to  $100,  ascends  during 
the  next  year  to  $105,  and  then  drops,  and  so  00,  ascending 
and  droppii^,  as  it  were,  by  a  series  of  teeth  until  the  whde 
ten  years  have  elapsed,  when  the  value  reaches  its  last 
height  of  $105  and  then  disappears  altogether.  In  these 
oscillations,  the  gradual  rise  of  $5  each  year  is  evidently  the 
«iilM«s<  oceruAf,  while  the  sudden  fall  of  $5  at  the  end  of  eadi 
year  is  the  income  taken  out. 

It  is  appropriate,  here,  to  remind  the  student,  that  the 
entire  height  from  the  base  line  to  any  point  in  this  tootb- 


4- 

J* 

00 

N 

so 

ao 

TO 

60 
50 

40 

so 

ao 

10 

Mlt34.S«T«A*A 

Fn.  5. 


like  curve  —  whether  at  highest  or  lowest  or  anywhere 
between  —  represents  the  value  of  the  capital  at  the  cor- 
i^wnding  instant  of  time.    Thb  slKraM  be  constantly 
borne  in  mind. 
Hm  life  hisUMy  d  such  a  bond  can  best  be  nen     the  aid 


Sk.4 


CARXAUtmO  IMOOIfB 


of  Figure  5.  The  ten  small,  dark  lines  mnked  "  5  "  stand- 
ing on  the  hue  line  MA  {oc  the  equivalents  oi  these  above 

the  par  line)  and  the  long,  dark  line  AB  represent  the  eleven 
sums  to  which  the  bondholder  is  entitled ;  in  other  words, 
the  small,  dark  lines  representing  the  interest  payments 
in  the  tm  successive  years,  and  AB,  the  primipal,  $xo^ 
due  at  the  end  of  the  ten  years.  The  problem  is :  Given 
these  eleven  sums  to  which  the  bondholder  is  entitled,  to 
show  in  the  diagram  the  value  of  the  bond  at  different  dates. 
Assuming  as  before  that  the  rate  of  interest  used  in  omiput- 
ing  is  5  per  cent,  we  obtain  the  results  seen  in  Figure  5. 
We  observe  that  the  value  of  the  bond,  just  before  it  be- 
comes due,  is  the  sum  of  Aa  (or  BC,  $5  of  interest),  and 
AB  (the  $100  of  {wim^pal).  This  sum  is  rqnesented  by 
the  /ertical  line  AC.  One  year  earlier,  just  o/iter  the  ninth 
interest  payment  ^4 'a'  (or  5'C'),  the  value  of  the  bond  is  A'B', 
or  $100,  being  the  discoimted  value  of  AC  obtained  by  draw- 
ing the  discount  curve  CB'.  The  value  just  before  the  ninth 
interest  payment  will  be  A'C,  or  $105.  Continuing  in  this 
manner  backward,  we  obtain  the  series  of  "  teeth,"  as  in- 
dicated in  the  diagram. 

n  the  varioia  discount  curves  in  F%ure  5  are  all  continiied 
to  the  left  (as  in  Fig.  6),  they  will  divide  the  line  MN,  rep- 
resenting the  present  value  ($100)  of  the  bond,  into  the 
eleven  parts  of  which  it  is  composed,  each  part  representing 
the  [uresent  value  of  one  of  tbt  deven  paymmts  to  wU(^ 
the  bond  entitles  the  owner.  Thus  the  present  value  of 
the  principal  is  seen  to  be  I61.39,  this  being  the  height 
above  M  at  which  the  lowest  discoimt  curve  meets  MN; 
the  present  vahie  <rf  the  last  <»r  toith  intamit  payment 
is  $3.07,  this  being  the  difference  in  height  between  the 
two  lowest  discount  curves;  the  present  value  of  the 
ninth  interest  payment  is  $3.22,  as  indicated  in  the  next 
above.  Sss&ify,  the  {xesest  vahw  oi  eadi  ci  the 
c^er  future  payments  is  indicated  in  the  diagram.  The 
putt  into  wUcb  MN  it  divided  thns  fonn  a  picture 


ii8     sLZMxiiTiuty  ntncanBS  or  accnioiiiCB  IOukIA 

of  the  eleven  pxeseat  values  calculated  earlier  in  this 
section. 

As  we  pass  feom  kit  to  r^t  in  the  diagram,  we  see  that 
the  value  of  the  bond  at  the  beginning  of  each  year  is 
$100,  made  up  of  the  discounted  values  of  all  the  remain- 
ing future  receipts;  and  that  the  value  increases  each  year 
along  a  discount  curve  to  I105  at  the  aid  ol  the  year,  iB»> 


100  Si 

t4J 

-  ^ 

V 

> 

-  «^ 

■^^ 

i 

^\ 

eoH 

80  - 

40  - 

so  - 

to  - 

10  - 

f 

1 

• 

1  1 

1  1 

I  1 

1  1 

1 

■ 

• 

no.  & 


mediately  before  the  annua]  payment  is  made.  The  value 
then  &ops  again  to  fxoo,  when  this  annual  income  is 
received.  It  thus  continues  to  oscillate  (just  as  in  Figure 
S)  between  $100  and  $105  each  year  to  the  end,  when  the 
final  income  of  $105  is  received. 

But  often  tl^  bend  is  not  sold  at  par  because  the  rate  of 
intiiMt  nied  1^  the  puf^Msr  in  calmlatint  what  he  ii 


CMRTAUSMO  IMOOMI 


willing  to  pay  for  it  may  be  more  or  less  than  the  five  per 
cent  named  in  the  bond;  in  other  words,  the  rate  nalmi 
by  the  pardiaier  may  be  voatt  or  lev  than  the  nomintd 
rate.  When  a  bond  is  sold  above  par,  this  fact  shows 
that  the  rate  of  interest  realized  by  the  investor  is  less 
than  five  per  cent.  In  this  case  the  bond  is  only  nomr 
inally  a  "  five  per  cent  bond."  If  the  rate  used  m  calcu- 
lating the  vahie  of  the  bond  b  four  per  cent,  that  value 


Valy»|<oo 

80 


60 

70 


40 


ao 


ao 


fO 


5^ 

a. 

3 

— 

r' 

d. 

a 

S 

s 

5 

S 

a 

s 

Ml      •      9     4.  9 

Fio.  7. 


A  A 


will  be  found  to  be  $108.17 ;  so  that  if  the  bond  is  sold  at 
$108.17,  the  purchaser  is  said  to  "  realize  "  four  per  cent. 
It  will  be  seen  that  the  rate  realized  is  that  maiftet  rate 
nMcb  b  actue^jr  used  for  dbcounting  eleven  items,  namdy 
the  ten  aomtal  Hems  of  I5  eedi  and  the  final  item  el  $ioo. 


120        Et^lCENt/  KY  PSINCIPLES  OP  ECONOMICS  [QUT.VI 


The  value  of  the  bond.  ^108.17,  is  found  in  the  way  already 
explained  and  is  illustrated  by  the  discount  curves  in  Fig- 
ure 7.  Expressed  arithmetically  the  calculation  consists  fai 
adding  together  the  following :  the  preioit  value  of  the  first 
payment  of  $5  (namely  that  due  one  year  hence)  which  is 
$5  -t- 1.04,  or  $4.81,  then  that  of  the  second  which  is 
$5 +  (1.04)'  and  so  on  up  to  and  including  the  present 
value  of  the  prioc^  which  is  $100  -t-  (1.04)".  sum 
is  $108.17. 

Here  the  five  per  cent  bond  is  said  to  be  sold  on  a  four 
per  cent  basis.  Its  capital-value  (I108.17),  at  the  begin- 
ning of  the  period  represented  ((.«.,  the  value  of  a  five  per 
cent  bond,  valued  on  a  four  per  cent  basis),  is  obtained 
just  as  before,  except  that  we  now  reckon  by  discounting 
at  four  per  cent  instead  of  at  five  per  cent.  Thus,  in  Fig- 
ure 7,  we  see  that  the  value  of  the  bond,  just  before  it  be- 
comes due,  is  $105,  or  AC;  that  its  value  one  year  earlier, 
just  after  the  ninth  interest  payment,  is  A'B',  or  $105  4- 
X.04,  or  $100.96,  and,  just  before  the  interest  payment,  is 
A'C,  or  $100.96  +  $5,  or  $105.96;  and  so  on  back  to  its 
value  at  the  beginning,  MN,  which  's  thus  found  to  be 
$108.17.^  This  is  greater  by  $8.17  than  the  value  of  the 
bond  as  reckcmed  on  the  five  per  cent  baas.  The  fact 
that  four  par  cent  has  been  used  in  our  calculatioa  instead 
of  five  per  cent  has  made  all  of  the  discount  oirves  ksa 
steep. 

We  see,  therefore,  that  nominally  the  rate  of  interest  of 
the  bimd  is  not  necessarily  the  actual  rate  of  interest  used  in 
buying  or  selling  that  bond,  and  if  the  value  of  the  bond  is 
calculated  on  the  basis  of  a  rate  of  interest  below  the  nominal 
rate  of  iataat  in  the  bond,  the  resulting  value  oi  the  bond 

*  Of  couiw,  the  same  result  could  be  obtained  by  discounting  separately 
at  four  per  cent  each  of  the  eleven  items  to  which  the  bondholder  is  en- 
titled and  adding  the  r£  ults  together.  The  elements  of  which  MN  is 
composed  may  then  be  easily  indicated  jut  as,  for  tbe  previoua  wampki, 


aartAmam  moom 


ISI 


win  be  abote  par.  Nominally  the  rate  of  interest  is  that 
named  in  the  bond  and,  as  previously  noted,  this  is  ths 
actual  rate  of  interest  if  the  bond  is  worth  par,  but  not 
otherwise.  The  actual  rate  is  always  that  rate  by  which 
the  actual  value  of  the  bond  is  calculated  from  the  pay- 
ments to  which  it  entitles  the  bdder.  Tracing  the  history 
of  the  capital-value  of  the  ten-year-five-per-cent  bond 
reckoned  at  four  per  cent  from  the  present  toward  the 
future,  we  may  say  that  the  rise  in  value  during  each 


80 


»0I 


80 


ao 


so 


10 


m — 


J-ilWI#l£ 


E.    8  a 


h  k  A 


Wm.  a 


year  is  the  interest  accrued  during  the  year  on  the  o^ntal- 
vahie  at  tbt  htgaadag  of  the  year.  Thus,  the  xfae  b 
value  during  the  first  year  is  four  per  cent  cl  fi^i?^  or 
$4.33,  and  in  the  last  year  is  four  per  cent  of  $100.96,  or 
I4.038.  It  is  also  clear  that  the  fall  in  the  o^tal-value  at 


SLimiRABY  nOiCIFLIS  OF  XCONOMICS    IChat.  VI 


tbe  end  of  each  year  (except  the  last),  when  the  payment 
of  the  nominal  interest  is  made,  is  exactly  $5.  That  is,  the 
income  taken  out  each  year  is  greater  than  the  mterest 
accruing  during  the  year ;  hence  the  general  decline  in  the 
capital-vahie  of  tht  bond.  In  the  Ust  year  the  income 
taken  out  is  $105 ;  although  if  the  investor  is  wise,  he  will 
put  back  at  least  $xoo  into  some  other  bond  or  equivalent 
property. 

The  reverse  is  true  if  the  present  value  of  the  bond  is 
calculated  on  a  six  per  cent  basis,  or  on  any  other  higher 
than  the  five  per  cent  named  in  the  bond.  Figure  8  repre- 
sents the  case  of  a  five  per  cent  bond  valued  on  a  six  per 
coit  basis.  In  this  case  the  discount  ourves  are  stecfwr 
than  in  Figure  5,  and  the  value  of  the  bond  at  present,  ten 
years  before  it  becomes  due,  is  $92.61.  In  Figure  8,  as  in 
the  preceding  diagrams,  we  know  that  the  rise  of  capital- 
value  during  any  year  is  ahrays  the  accmmg  interest  on 
the  capital-value  at  the  beginning  of  that  year.  Thus,  the 
rise  in  the  first  year  will  be  six  per  cent  of  $93.61,  that  is, 
$5.55,  and  the  rise  during  the  last  year  will  be  rix  per  c«it 
of  $99.05,  namdy,  $5.95.  It  is  also  dear  that  the  dn^  in 
capital-value  at  the  end  of  each  year  is,  as  before,  equal  to 
the  income  taken  out,  or  $5 ;  that  is,  the  income  taken  out 
each  year  is  less  than  the  interest  accrued  during  the 
year ;  hence  the  goieral  increase  in  the  capital-valitt  ci  the 
bond. 

It  will  be  seen  (as  shown  in  the  three  figures,  5,  7,  and  8) 
that  the  final  value  of  the  bond  just  before  it  becomes  due 
win  be  $105  in  all  three  cases,  but  that  the  present  value  is 
different  in  each  case;  namely,  $100,  $108.17,  and  $92.61. 
In  each  case  the  value  zigzags  year  by  year,  but  approaches 
in  a  general  way  $105  as  its  final  value.  If  the  "  five  per 
cent "  bond  is  sold  cm  an  actual  five  per  cent  basis,  the 
value  of  the  bond  'j  maintained  year  by  year,  as  seen 
m  Figure  5,  where  the  curve  indicating  capital-value  runs 
m  general  horizontally;  if  it  is  sold  (m  a  four  par  cmt  basis, 


"3 


its  value  in  general  decreases,  as  shown  by  the  descending 
trend  of  the  cturve  in  Figure  7 ;  while,  if  it  is  add  on  a  six 
per  cent  basis,  it  tends  to  increase  in  value,  as  shown  by 
the  general  tqymid  tnnd  in  Rguze  S. 

Elaborate  tables  have  been  constructed,  called  "  bond- 
value  books,"  calculated  on  the  foregoing  principles.  They 
are  used  by  brokers  for  indicating  the  true  vahie  <rf  bonds  on 
difieient  bases;  that  is,  the  prices  a  man  ought  to  pay  for 
bonds,  at  different  rates  of  interest  and  having  different 
times  in  which  to  mature,  in  order  to  realize  on  them  the 
market  rate  of  interest.  These  tables  are  also  used  fof 
solving  the  converse  problem,  viz.,  for  finding  the  true  rate 
of  interest "  realized  "  when  a  bond  is  bought  at  a  given  price. 
This  rate  realized  will  be  the  market  rate,  if  the  man  has 
paid  the  right  price,  but  sometimes  he  pays  a  wrong  price. 
CHven  the  mari^et  rate,  we  can  deduce  the  right  price  to 
pay.    Given  the  actual  price  paid,  we  can  deduce  the 
actual  rate  realized.    The  following  taWe  is  an  abridg- 
ment of  these  brokers'  tobies,  for  a  five  per  cent  bond. 
The  prices  of  sudi  a  boi^  are  in  all  cases  the  priccB  fanme- 
diately  after  an  instalhnent  of  interest  has  been  received. 
In  all  cases  the  gradual  increase  in  capital-value  during 
any  time  is  equal  to  the  intend  accruiag  during  that  tfan^ 
while  the  sudden  decrease  al  any  tfane  is  equal  10  the  wins 


RATES  OF  INTEREST 

Five  Pek  Cent  B<»a> 


s 

1 

M 

I03 

30 

4.6 

4.8 

lOX 

4.8 

4.9 

100 

S-O 

SO 

SA 

99 

6.1 

S-a 

98 

7» 

5-5 

5-3 

134       BUMBNTAEY  PXOICIFUf  Ot  lOOilOIIICS  iCaAr.VI 

tf  tim  imcemt  Mm  otA  at  that  tfane.  Tbe  ooly  eiCBptioM 

to  these  statements  are  when  capital-value  varies  up  or  down 
because  of  changed  opinion  as  to  the  chances  of  future  in- 
come ;  but  we  are  here  assuming  that  there  are  no  uncer^ 
taiiitks  to  be  reckoned  with. 

From  this  table  we  see  that  if  the  so-called  five  per  cent 
bond  is  sold  at  $xo3,  and  has  one  year  to  nm,  it  will 
"  yield  "  the  investor  three  per  cent ;  that  is,  if  three  per 
cent  it  used  in  cakulating  itf  valtie,  tlijit  vahw  will  be 
$102.  Again,  if  the  bond  has  five  years  to  run  and  is  sold 
at  $102,  it  will  yield  the  investor  4.6  per  cent ;  and  if  ten 
years,  4.8  per  cent.  If  the  bond  is  sold  at  $98  and  has 
one  year  to  run,  it  will  y^  the  investor  7.1  per  cent ;  if 
ten  years,  5.3  per  cent.  If  it  is  sold  at  par,  it  will  yield  five 
per  cent,  whatever  may  be  the  number  of  years  it  has  to  run. 

The  same  principles  as  have  just  been  applied  to  valuing 
bonds  apply  also  to  valuing  any  other  artide  of  property  or 
wealth.  The  student  wiU  find  it  a  useful  exerdse  to  draw 
diagrams  for  other  cases.  He  may  construci  a  series  of 
diagrams,  the  vertical  lines  representing  the  successive  items 
of  income  expected,  and  beginning  at  the  last  item  proceed 
iMckward  year  by  year,  by  a  series  of  teeth,  to  obtain  the 
I»esent  value  of  die  capital.  The  value  of  the  capital  must 
always  be  first  traced  backward^  but,  after  it  has  been  obtained, 
we  may  retrace  our  steps. 

The  zigzag  curves  which  have  been  indicated  for  bonds 
and  which  could  be  constructed  for  exhibiting  the  valua- 
tion of  any  other  property  right  entitling  the  owner  to 
definite  sums  of  money  or  boMfits  of  definite  value  at 
definite  times  are  visual  representations  of  the  fact  that 
the  present  value  of  any  future  benefit  or  collection  of 
benefits  gradually  rises  as  the  time  grows  near  for  their 
realization  and  suddenly  falls  as  the  realization  occurs. 
The  rate  at  which  the  vsdue  thus  grows  with  time  (between 
benefits-realized)  is  the  rate  of  interest  employed  in  these 
nuurket  valuations. 


Sw.fi 


1 8.         Qt  dumciiif  the  Rate  of  Intereit 

From  what  has  been  said,  it  is  evident  that  the  value  of 
any  article  of  capital  depend*  very  greatly  on  the  rate  of 
interest.  If  there  were  no  rate  of  interest,  or  if ,  in  other 
wocdt,  the  rate  of  interest  were  zero,  the  value  of  the  capital 
would  be  simply  the  sum  of  the  values  of  the  anticipated 
benefits.  In  the  case  of  the  five  per  cent  bond,  for  instance, 
running  for  ten  years,  if  redioned  on  a  Mr9  per  etui  fof<ff,ita 
vahie  woidd  be  tfanfrfy  the  sum  of  the  $ioo  and  the  ten  in- 
terest payments,  amounting  to  $50,  or  a  total  of  $1 50.  Since 
the  rate  of  interest  is  always  kigker  than  zero,  the  value 
of  the  bond  will  always  be  lower  than  $150.  To  change 
the  rate  of  interest  will  always  change  the  value  of  capital 
in  the  opposite  direction.  For  several  generations  the 
rate  of  interest  has  been  falling,  and  consequently  the 
value  of  bonds  and  of  capital  in  general  has  tended  to 
ifae.  Of  oottiie,  the  change  in  value  of  capital  will  be 
due  also  to  many  other  circumstances  than  the  change  in 
the  rate  of  interest,  and,  moreover,  the  effect  of  the 
change  in  rate  of  interest  will  not  be  the  same  on  all 
artides  of  capital  For  instance,  the  capital,  the  income 
from  which  is  most  remotely  future,  will  be  most  affected. 
The  following  table  shows*  the  effect  of  lowering  the  rate 


Ratb  or 
Smr  Ixooia  nw  Ybab 

Total 

IXOOMB 

CAmAL-VALUS 
(bit.  AT  s%) 

CAWTAlrVAHni 

(Int.  at  2i%) 

Land 
Hotise 

Hone 
Suit  of 

dothet 
Loaf  of 

$1000  per  yr.  forever 
$1000  per  yr.  for  50 

yrs. 

$100  pel  T.  for  6  yrs. 
$30  xst  .  r.;  $zo  ad 

$36.50  per  yr.,  for  I 

Infinite 

$50,000.00 
600.00 

30.00 

.10 

$30,000.00 

18,300.00 
508.00 

a8.oo 
.zo 

28,400.00 
55100 

.zo 

tllie  figures  in  thb  tabk  an  w 

orited  out  bjr  tiM  jwlwitjpl 

•  of  diMMi*> 

tt6     BtmHtiurt  wtmeatM  m  ■cowomci  |Cm»-  vi 


of  interest  from  5  per  cent  to  2I  per  cent  five  typical 
articles,  whose  incomes  have  difietent  degrt     of  remoie- 

If  the  value  of  the  benefits  derivable  from  thes(  \  a  ouf 
articles  continues  in  ach  case  uniform,  but  the  rat«  oi  in 
terest  is  suddenly  cui  down  from  5  per  cent  to     pei  cent, 
Am  «01  renit  a  general  ktcrmm  fat  the  oqiltid-valoes.  but 
a  very  different  increase  fi    HfTerent  a  licit >.   The  !"ore 
enduring  ones  will  be  affected  the  most.    Thest   iiect  'e 
seen  in  the  last  i.AO  columns  of  the  table.    Wl.  <  the  lai 
«f  knnum  b  ha>v«d,  tbe  vahie  of  tlir  land  will  be  doubled 
rising  from  $20,000  to  540,uoo,  but  the  valrr  of    e  hous< 
will  rise  by  only  about  sixty  per  cent,  namely,  froi   m  ,300 
to  $38,400;  the  value  of  the  horse  will  ri^  •    nly  n 
cesl,  Mundy,  from  $saS  to  $551 ;  the  vailue  c  f  tlie  -^uit  imt 
iIr  Miy  Irom  $38  to  $39;  and,  finall}    ^he  v  3l     of  thr 
kmf  of  bread  will  not  rise  at  all,  but  will      lain         cen  = 
We  see  from  the  changes  in  the  values  of  Uie!>e  i  e  i  pe- 
artides  iHmA  the  waaH&^mem  ol  oqpilal-va^  to  a  dmf^ 
in  the  rate  of  interest  is  the  greater  tte  more  ranote  le 
income.    A  high  rate  of  interest  ran  uiree     high  p^-er  n 
on  income  near  at  hand  as  ctrnxpait    w  th  u  jme  re  y 
fotwe;  or,  ezprcaied  the  otiw  wm  dbeitt,  a  high  sati  ai 
intwest  diminishes  the  attr  tivet  ^^ss  of  remotf  •  ^--^mt 
bcome  as  compand  mth  iiu  mm  daee  1^  h^tad. 


CHAPTER  Vn 


VAUAT1JM8  or  CNCOMB  IK  RELATION  TO  CAPITAL 

We  have  seeL  uw  the  value  of  capital  is  derived  from  that 
of  ineome.  We  have  also  wten  dMt  tke  vahie  of  capital 
r  «s  in  anticipati(Hi  of  income  and  ialls  after  its  realization, 
'i  alternate  rise  and  fall  may  or  may  not  be  equal.  From 
the  principles  explained  it  is  evident  that  the  rise  of  the  capi- 
tal-value as  it  ascends  on  the  disMnmt  CtffVC  IS 
interest  accrued  on  that  capital  during  that  time,  while  the 
fall  in  that  cap^'al  value  due  to  the  taking  uut  of  income 
is  equal  to  H<  tcmi  taken  out.  If  the  income  taken  out 
b  just  equ.  iStt  fntemt,  the  capitiJ  Is  thereby  resbmd 
to  its  origin.  //  more  tkan  iMs  amount  of  income 

be  taken  out,  i  al-value  wiU  oe  impaired,  that  is,  mad* 

less  than  it  wu^  beginning  of  the  period  under  considenh 
Hon;  if  less,  the  capital  mdme  wSl  increase. 

When  a  man  is  said  to  own  a  capital  fund  of  $1000,  this 
means  simply  that  he  owns  capital-goods  worth  that  much ; 
and  these  capital  goods  are  worth  that  much  simply  be- 
cause, in  terms  of  m<»ey,  the  discounted  value  of  the 
eq)ected  income  from  them  is  that  much.   The  income 
which  he  expects  may  be  a  perpetual  income  flowing  uni- 
formly or  in  recurring  cycles ;  or  it  may  be  an  income  like 
thst  from  the  bcmd,  flowing  reoirrently  lor  a  limitoi  ther 
at  the  end  of  which  a  large  lump  sum,  ordinarily  called 
"principal,"  is  returned  in  addition ;  or  it  may  be  ar 
of  innumerable  other  forms.  Thus  if  we  assume  thi. 

m 


ISS       ELOtXHTAMY  WMOKSBLU  Gt  SOOMOMICS  {C^  lV.Vn 

per  cent  is  the  rate  of  interest  used  in  calculating  the  capital- 
value,  then  any  one  of  the  following  investments  will  have 
a  presmt  value  of  $1000:  a  popetual  annuity  of  $50  per 
year ;  or  an  aimuity  of  $50  a  year  for  ten  years,  togetiier 
with  $1000  at  the  end  of  that  period ;  or  $100  a  year  for 
fourteen  years,  after  which  nothing  at  all ;  or  $25  a  year 
for  ten  years,  followed  by  $167.50  a  year  for  ten  years,  after 
which  nothing  at  all;  or  any  one  of  innumerable  other 
forms.  The  student  can  easily  prove  that  any  one  of  these 
series  of  incomes,  when  discounted  at  hve  per  cent,  will 
make  up  a  i»esent  value  of  fiooa 

In  the  first  case  the  income  taken  out  ($50  a  year)  is 
exactly  equal  to  the  annual  accrued  interest,  for  I50  is  the 
interest  for  one  year  at  five  per  cent  on  $1000.  The  same 
b  true  of  tbt  second  instance  meatimied,  that  oi  the  five 
per  cent  bond,  except  in  the  last  year  when  the  iucome 
taken  out  ($1050)  exceeds  the  interest  for  the  year  by 
$1000,  thereby  reducing  the  value  of  the  bond  to  zero. 

In  tlw  third  case  the  inomne  taken  out  the  first  year 
is  $100,  while  the  interest  accn'  d  in  that  year  is  only  $50. 
Thus  the  income  taken  out  exceeus  the  accrued  interest  by 
I50.  This  excess  of  $50  involves  a  reduction  of  $50  in  tlue 
c^sital-value  of  the  pnq>erty,  which  therefore  becomes  $950 
instead  of  $1000.  Thus,  at  the  end  of  the  first  year  and 
after  the  $100  of  income  has  been  taken  out,  $950  is  the 
discounted  value  of  the  remaining  thirteen  items  of  $xoo  a 
year  for  each  year.  Li  the  seooiul  year  the  mterest  (cm 
$950)  is  $47.50 ;  whereas  the  income  taken  out  is  $100,  the 
difference  being  $52.50.  Hence,  at  the  end  of  the  second 
year,  the  capital-value  of  the  remaining  payments  has  been 
reduced  by  $52.50,  beoaniiig  $897.50.  ^nikuly,  the  oipi- 
tal-value  of  the  property  decreases  each  year  by  the  excess 
of  the  income  over  the  accrued  interest  tmtil  the  last  in- 
come item  of  $100  is  received ;  after  ^diich,  no  more  income 
being  andc^ted,  the  capital-value  Is  zero. 

In  the  fourth  case,  the  interest  accntkg  duiinf  the  fint 


▼AUAnOMt  OV  IHOOIfB 


139 


year  is  $50,  whereas  only  $35  income  is  taken  out  at  the 
end  of  the  year,  the  difference  being  $35.  Hence,  at  the 
bqjiiuiingof  the  second  year  the  capital-value  of  the  bond 
goes  up  to  $1025.  During  the  second  year,  the  interest  (on 
$1025)  is  $51.25.  After  the  receipt  of  the  second  income 
item  of  I25,  therefore,  the  capital-value  of  the  bond  is  in- 
creased by  the  difference  ($26.35)  and  becomes  $1051.35. 
Similarly,  the  value  of  the  bond  increases  until  after  the 
payment  of  the  tenth  income  item  of  $25,  when  it  becomes 
$13x4.43.  The  interest  on  this  amoimt  in  the  eleventh 
year  is  $65.73 ;  whnras  tte  kcooie  taken  out  that  year, 
and  each  of  the  remaining  nine  years,  is  $167.50.  Hence, 
from  the  beginning  of  the  eleventh  year  to  the  end  of  the 
twentieth,  the  capital-value  of  the  bond  decreases,  finally 
iMdikg  too  at  tltt  end  of  Uie  peiiod. 

The  principle  here  shown  may  be  summarized  as  follows : 
(i)  When  a  property  yields  a  spedfied  foreknown  income, 
and  is  valued  by  discounting  that  income  at  a  specified  rate 
ol  intoeft,  if  tlw  ino(»ne  taken  out  is  equal  to  the  iatocrt 
accrued,  the  value  of  the  capital  will  be  restored  each  year 
to  the  level  of  the  year  before.  (2)  If  the  income  taken  out 
exceeds  the  interest  accrued,  the  value  of  the  capital  will  fall 
below  that  of  the  year  befirae,  the  amount  <rf  llie  foU  being 
equal  to  the  amount  of  the  excess.  (3)  If  the  amount  of  in- 
come taken  out  is  less  than  the  interest  accrued,  the  value  of 
the  capital  will  rise  above  that  of  the  year  before,  the  amount 
(tf  tlw  liae  being  equal  to  the  amount  d  the  deficiency. 

Briefly,  the  general  principle  connecting  income  taken  out 
and  interest  accrued  is  that  they  differ  by  the  net  apprecia^ 
Hon  or  depreciation  of  capital.  It  is  thus  possible  to  describe 
fatwwrt  nccrand  as  iwtonM?  takfw  wtt  hi§4if)ffffil#tV?**  *^  ^fffH 
kaL  or  aa       m>  taken  out  ohia  aoDraeiBtfoB  oi 

n  orav  uitt  ttCM  unpowiiit  itmioin  totcf  m  m  cmr 
•ad  vivid  as  ponihli,  we  ihni  ffliatrate  diaa  by  CMiriftn 


ISO    KLoaanTAKt  ramanu  ot  ioomomics  \Cmi».vn 


examples,  and  by  business  accoiinting.  The  following  table 
gives  the  income  supposed  to  be  taken  out  isa  five  selected 
HtMfa  of  capital-wealth;  the  oqiital- value  found  by  dis- 
counting that  income  at  five  per  cent ;  the  accrued  interest 
for  the  first  year;  the  resulting  change  or  net  appreciation 
or  depreciation  of  o^iital-vahte ;  and  the  ratio  of  the  first 
year's  income  to  the  original  capital-value. 

The  student  will  readily  understand  how  the  figures  in 
the  successive  columns  are  calculated  although  the  actual 
calculation  of  the  third  cdumn  (cai»tal-valtte)  from  the 
•eomd  (income)  is  a  tedious  process  involving  in  most 
cases  the  discounting  of  a  large  number  of  separate  itms. 


Imcuau 

fwut 

IMOOHITO 

0ua»AL 
Cairal- 

VAUS 

Cakial- 

Inooms  takim  odt 
m  Ybak 

Camtal- 
(bB. 

Iimun 

ACatVKD 

won  Fbr 

(+)<»Dk- 
cutAsa  (-) 
oiCakkal- 
VALBB  m 

Fun  YxA> 

Fogccstland 

$1000  a  yr.  for 
14  yrs.  and 

% 

then  $3000  a 

+$1000.00 

yr.  foiem  . 

$40,000.00 

$3000.00 

•  s 

Famluid 

$1000  per  yr. 

forever  .  . 

ao,ooo.oo 

XO0O.O0 

0.00 

5.0 

Honw 

$1000  per  yr. 

-85.00 

for  so  JTS.  . 

18,300.00 

915.00 

54 

$100  per  yr.  for 

-74.60 

19.6 

6  yn.    .  . 

508.00 

35.40 

Suit  of 

$3oistyr.;|io 

-18.60 

dothes 

adyr.    .  . 

28.00 

1.40 

714 

z.  The  forest  land  yields  $1000  worth  of  income  the  first 
year  on  a  c^dtal-value  of  $40,000,  firom  td^di,  on  the  five 
per  cent  basis  ^'W*^,  the  interest  accrued  would  be  five 
percent  of  $40,000,  or  $3000.  Consents'  •  the  income 
taken  out  ($1000)  is  less  than  the  inters  .  oued  ($3000) 
by  liooo.  Therefore  the  forest  will  appreuAte  hi  the  year 
fegrtlieeaoess,  $3000  — $1000,  or  $1000,  and  will  be  worth 
at  the  end  of  the  year.  Similaiiy,  it  wiU  oontiiitte 


8k:  il 


VAitAXioi«  or  moom 


to  ai^redate  for  fourteen  years,  when  it  will  be  worth 
|6o,ooo ;  after  which  the  income  that  is  annually  taken  oat 
($3000)  win  be  equal  to  the  amnial  accrued  totemt  en 
t6o,ooo. 

2.  The  farm  land  yielding  $1000  a  year  in  perpetuity 
is,  on  the  five  per  cent  basis,  worth  $20,000,  and  continues  to 
be  worth  that  amount  each  succeecBiig  year.  The  income 
taken  out  ($1000)  is  ahvays  equal  to  the  iatcnet  aocnied 
from  $20,000. 

3.  The  house  yields  an  income  of  $1000  on  a  capital- 
vahie  the  fint  year  <rf(Hify  $18,500.  The  interest  aocnwd  on 
$18,300  would  be  five  per  cent  of  $18,300,  or  only  $015.  The 
consequence  is  an  excess  of  income  taken  out  over  interest 
accrued  of  $1000  —  $915,  or  $85,  and  a  corresponding  fall 
<rf$85inthevahieo{thea4)ital.  That  is,  ti»  hmise  d^nd- 
ates  by  $85  in  the  year,  or  from  $18,300  to  $18,315.  It  will 
continue  to  depreciate  each  year  until  its  value  vanishes 
entirely  at  the  end  of  fifty  years. 

4.  Tkt  k$ne  also  depiedates,  and  very  int  Its  owntt 
realizes  from  the  horse  an  income  of  $100  on  a  capital-value  of 
$508,  from  which  the  interest  accrued  would  be  only  $3540. 
The  difference  between  the  income  taken  out  and  the  interest 
accrwd  is  fxoo  —  $2540,  or  $74^  and  the  hone  kit 
that  much  in  value  during  the  year,  and  will  continue  to 
dq)reciate  in  value  f(H:  all  of  the  six  years  during  which  it 
yields  income. 

5.  Tk$  tuit  ef  dotkes  yields  aa  income  die  first  year  ci 

$20  on  a  capital  of  $28,  from  which  the  interest  accrued 
would  be  only  $1.40.  It  therefore  dq>reciates  by  the  differ- 
ence, $30  —  $1.40,  or  $18.60. 

In  aH  cases  the  interest  accrued  is  5  per  cent  of  the  capital* 
value,  while  the  income  taken  out  is  in  some  cases  a  higgler, 
and  in  some  cases  a  lower,  percentage.  Expressed  in  per- 
centages, the  actual  rate  of  value-return  (*.«.,  ratio  of  income 
Ukm  to  c^pkal)  on  Hkm  fsnrt  land  is  ^.s  jw  ottt; 
OB  the  fm  kyMlf  5  per  cwl;  eft     howii  $4  pwiaiit 


132    BiJEiixiiTASY  nmciKxs  OT  icoNoifics  [Qup.vn 

on  the  horse,  19.6  per  cent;  and  on  the  suit  of  clothes,  71.4 
po:  cent.  The  more  rapidly  the  income  is  taken  out,  the 
greater^  rate  of  valtte-retum  realized;  but  (if  that  rate  ex- 
ceeds the  rate  of  interest)  the  more  rapidly  will  the  capital 
be  exhausted.  The  house  yields  a  rate  but  slightly  higher 
than  the  rate  of  interest,  and  lasts  50  years ;  the  horse  yields 
a  rate  neaiiy  4  timet  the  rate  of  interest,  but  it  lasts  only  6 
years ;  and  the  clothes  yield  a  rate  over  14  times  the  rate  of 
interest,  but  last  only  2  years.  The  farm  land,  which  yields 
a  rate  exactly  equal  to  the  rate  of  interest,  lasts  forever, 
wfaik  the  fottat  land,  whkh  yidkb  a  rate  only  half  the  rate 
of  interest,  not  only  lasts  fwevor,  but  also  increases  in 
value  for  the  first  14  years. 

The  various  cases  supposed  may  also  be  illustrated  by  the 
dividends  dedared  by  a  joint  stodkamqwny.  Ifacompany 
declares  dividends  of  five  per  cent,  when  it  earns  five  per 
cent,  these  dividends  will  be  the  interest  accrued  on  the 
capital  and  will  leave  it  intact  If  the  dividends  are  less  than 
five  per  omt,  cai^tal  wOI  be  accumulated;  that  is,  a  "sur- 
ph» "  will  be  added  to  the  original  capital.  If  the  dividends 
are  greater  than  five  per  cent,  the  capital  or  surplus  pre- 
viously accumulated  will  be  decreased.  In  the  last-named 
case  ^  company  is  said  to  pay  its  <fivi(tends  partty  "out  d 
capital."  Such  a  practice  is  unusual,  and  when  it  occura  is 
gmerally  condemned  because  of  an  assumed  intention  to  de- 
ceive as  to  the  ability  to  pay  dividends. 

A  cMe  at  the  <^ipoiite  extreme  occurs  tHien  tlie  divickfi^ 
are  made  unusually  small  in  order  that  the  capital  may  be 
increased.  There  is  in  New  York  City  a  company  which  has 
never  declared  any  dividends,  but  has  been  rolling  up  a  large 
MopluB  for  years,  and  whose  stodt  is  for  tMs  reason  mudi 
aim  par. 

fa.  Ceofoiloaa  to  ba  Avoidad 


WAi  all  the  pwcedim  wrplsnstinns  and  illustrations  the 
.ii^tfif^x^iffl  between  inroiw  takM     and  hiltnil  accmad 


shouU  be  dear.  Interest  accrued  is  the  income  which, 
if  it  were  taken  out,  would  maintain  a^tal  intact,  neither 
in^alred  DOT  increased,  at  the  vtlM  ft  IhmI  at  tbB  bq^oii!^ 
of  the  period  imder  consideration. 

Of  the  two  concepts,  income  taken  out  and  interest  ac- 
crued, the  former  is  by  far  the  more  fimdamentaL  Every- 
thing dse  depends  upon  income  eaqtected  to  be  taken  out. 
We  cannot,  as  would  at  first  seem  possible,  begin  with  ca{utal- 
value  and  derive  the  actual  income  from  it;  nor  can  we 
begin  with  interest  accrued,  for  interest  accrued  presupposes 
wamt  d^tal-value.  That  is,  inteicat  accrued  depeada  oa 
capital-value,  and  capital-value  depends  on  income  to  be  taken 
out.  The  order  of  dependence,  then,  is  income  taken  out, 
o^ital-value,  interest  accrued.  It  is  not  uncommon  to  con- 
fuw  these  three  ooroqpts.  The  ilhistetive  table  d  a)  ef 
this  chapter  will  help  to  keep  us  from  confusing  them.  Fat 
instance,  from  this  table  we  see  dearly  one  reason  why 
certain  artides  have  been  erroneously  identified  with  income. 
QotlMs  have  neaiiy  the  same  o^tal-vahie  as  incaine>vatae, 
so  that,  if  a  person  were  not  accustomed  to  fine  distinctions, 
he  might  think  it  unnecessary  to  discriminate  between  the 
$30,  which  is  the  total  value  of  the  use  of  the  dothes  for  two 
wfaldi  fa,  tteefore,  aMCMiw,  aad  the  $s8,  fdiidi  it  tfM 
value  of  the  dothes  themselves,  and  which  is,  therefore,  capi- 
tal. There  is  abnost  as  much  danger  of  such  confusbn  in 
the  case  of  the  horse ;  for  there  is  no  very  great  difference 
between  the  f6oo,  the  value  of  the  use  (rf  the  hone,  aad  the 
$508,  which  is  the  value  of  the  horse.  As  we  pass  to  the 
more  enduring  artides,  there  emerges  so  wide  a  difference 
between  the  value  of  the  use  of  an  artide  and  the  value  of 
the  article  ttadf,  that  there  k  no  (Bfficalty  in  rtiiriimiMitt 
between  them.  But  if  the  distinction  is  valid  in  one  com,  amd 
aU  acknotdedge  thai  it  is,  it  is  valid  in  the  others.  We  find  no 
difficulty  in  distinguishing  between  the  shdter  a  house, 
whkJi  kiaoome,  aad  tihe  home  ite^,iriddiiici|iitd;  aet 
hrtwitt  tiwir  vataea.  Una  tiw  ilMHer  h  umlk  ^noo  a 


134    BJOBNTAiy  nwcmn  or  EcowoMica  icuv.  vn 


year  for  50  years  (or  $50,000  in  all),  whereas  the  house  itself 
is  the  discounted  value  of  all  this  $50,000,  or  only  $18,300. 
We  ou^t  to  find  no  greater  difficulty  in  distinguishing  be* 
twmm  <ke  hone  and  the  use  of  the  horse,  nor  between  the 
clothes  and  the  use  of  the  clothes. 

The  more  ra{ndiy  any  capital  yields  up  its  benefits,  that 
is,  the  fgnakat  the  late  at  which  its  income  is  taken  out,  the 
nme  the  tmga  of  eMfMiBf  Hut  capital  with  the  income  it 
yields. 

We  have  shown  the  tendency  to  confuse  three  concepts  — 
interest  accrued,  income  taken  out,  and  capital-vahie.  We 
lMi;ve  abo  dealt  with  a  fmirth  ceiieq>t,  which  must  not  be 
confused  with  the  other  three,  viz.,  appreciation  or  deprecia- 
tion. Appreciation  is  also  sometimes  called  samngs,  for 
savings  in  its  broadest  sense  includes  more  &an  simply  saved 
toaoey.  It  indndes  all  the  net  increase  in  capital-value  after 
all  income  has  been  detached.  It  is  the  net  appreciation, 
or  the  difference  between  the  interest  accrued  and  the  income 
taken  out  Savings  are  thordore  still  a  part  of  capital. 
They  are  the  part  <A  aeptHtl  saved  from  being  taken  out 
for  income.  They  are  not  a  part  of  income  taken  out. 
The  individual  is  always  struggling  between  saving  more 
capital  and  taking  out  more  income.  He  cannot  do  both — 
lutve  his  cake  and  eat  it  too.  A  savings  bank  depositor  is 
sometimes  thought  to  draw  income  from  his  deposit  when 
the  interest  merely  "  accumulates  "  in  the  bank.  This  is 
an  error.  The  bank  renders  income  to  the  depositor  when, 
and  m&f  iAm^  money  is  drawn  out  <A  it.  It  occasions 
him  outgo  when,  and  only  when,  money  is  put  into  it.  If 
the  depositor  merely  lets  his  deposit  acamiulate,  he  derives 
no  income  and  suffers  no  outgo.  There  is  no  effect  on  in- 
come. The  only  effect  is  upon  capital,  which  is  made  to 
increase.  If  we  accept  the  fiction  that  the  man  who  allows 
his  savings  to  accumulate  virtually  receives  the  interest,  we 
must,  to  be  consistent,  also  accept  the  fictim  that  he  n- 
d^KMitt  it  and  so  tiha  ncc^it.  n  tlie  tsBer  kandt 


saa  St  vauaum     OKxm  tjs 


9ver  tlie  bteitst  across  the  counter,  the  dfrpodtor's  account 
w  *^f^  against  the  bank  certainly  yields  up  '  income  "  to 
him,  but  if  the  depositor  hands  it  back,  the  account  occasions 
*'  outgo,"  and  the  net  result  is  simply  a  cancellation.  To 
allow  a  deposit  to  ac^'  malate  is  evidoitly  equivalent  to  this 
dottUe  qperatbn.  «  ee,  then,  that  net  appreciation  is  not 
inomie,  but  is  an  u.-  'ion  to  capital.  Likewise,  net  de- 
predation is  not  outgo,  but  is  a  subtraction  from  cq;^tal. 
Afanost  every  article  except  land  ultimately  depreciates  in 
vahie,  owing  to  the  fact  that  the  services  which  it  still  re- 
mains capable  of  rendering  gradually  diminish  in  numb« 
and  value.  The  approaching  cessation  of  services  may  be 
due  to  physical  wear  and  tear,  but  not  always.  Sometimes 
the  eqvesskm  "wear  and  tear  "is  a  misnomer.  There  are 
articles  which  suffer  no  physical  change,  but  of  which  the 
services,  nevertheless,  last  only  a  limited  period.  On  the 
Atlantic  coast  the  fishermen  sometimes  construct  temporary 
platfOTKttwfaidi  axe  inretty  rare  to  disappear  in  the  Septem- 
ber gales.  It  is  evident  that  without  any  physical  deteriora- 
tion during  the  summer  the  value  of  such  pnpctty  must, 
nevertheless,  decrease  raindly  as  the  end  of  the  fiddng  sea^* 
son  appioaches.  The  ''Worid's  Fair"  buildings  at  St 
LoUis  dquredated,  during  the  brief  period  of  the  fair,  from 
$15,000,000,  which  was  first  paid  for  their  construction,  to 
$386,000,  for  which  they  were  sold  after  they  had  served 
their  main  purpose  dining  the  leiriBoatiis  of  the  Fair.  Hm 
buildings  equipping  a  mme  become  war&iam  when  the  mine 
is  exhausted.  "Wear  and  tear,"  therrfore,  is  a  phrase 
which  we  should  use  only  in  a  mett^horical  aoue.  Evoi 
when  tiieie  is  actaal  pMcal  dettriontiQn,tfaiidetiiiocato 
affects  the  value  <mly  in  so  far  as  it  decnaMS  or  terminates 
the  flow  of  income,  and  not  directly  because  of  a  physical 
change  in  the  capitd  which  bears  the  income. 

There  are,  flm,  four  conttpts  i^iidt  wa  must  keep  ^s- 
thict  SUted  in  the  order  of  dipMteioe  on  iBCone  HbB 

out,  thcM  osaMpCt  am:— 


136    BLXiimm  iiiMcittii  Of  tcoNoiixcs  Ic«ap.  vn 


(x)  Income  (value)  taken  out 

(a)  Capital-value  (the  cUioouiited  vahie  of  eipected  in- 
come to  be  taken  out). 

(3)  Interest  accrued  (the  interest  on  capital- value). 

(4)  Appreciation  (the  excess  of  interest  accrued  over 
inomie  UdLcn  out),  and  its  qjpodte,  dqwedatkm  (the  exceas 
of  income  taken  out  over  interest  accrued). 

This  order  of  dependence  together  with  the  dependence 
of  the  first  element  (income  taken  out)  on  antecedent  ele- 
moits  previouatsr  explained  may  be  omvenientfy  opieiaed 
in  a  Ktone  as  follows : — 

CMflM  mdth-^Bcnefits  (income) 

Caoital  valM  ^^'^  (value)  tto  «»"t|_^jAiyitd«tfcm  or 
^  '^laXenat  accrued  j     I  depndatkn 

§  4.  Standardizing  Income 

Various  devices  have  been  used  to  make  income  taken  out 
agree  with  interest  accrued.  The  method  of  the  depre- 
dation fund  has  already  been  mentioned  under  income 
accounts,  and  before  the  relation  of  income  to  capital  was 
explained.  By  means  of  a  depreciation  fxmd,  an  irregular  net 
income  is  converted  into  a  regular  net  income ;  and  we  know 
that  the  capital-value  of  a  perpetually  regular  inotane  will 
remain  constant  For  instance,  the  possessor  of  $18,300 
purchases  a  house  and  obtains  at  first  an  income  worth 
Jtcoo  a  year.  He  knows,  however,  that  by  the  end  of 
50  years  the  house  will  need  to  be  rebuilt,  and  therefore 
sets  aside  a  defHredation  fund  into  which  he  pays  annually 
a  sum  equal  to  the  rlepreciation  of  his  house.  This,  in  the 
first  year,  is  $85,  as  v  .'  have  seen.  The  depreciation  fund 
costs  him  this  sum  as  outgo  the  first  year.  At  the  end  ci 
50  yean  Ins  depreciation  fund,  accumulated  at  interest, 
is  large  enough  to  rebuild  the  house.  Although  the  house 
6y  itself  does  not  yidd  him  a  uniform  income  of  I915  for- 


8k.  4l 


yjatATum  or  moon 


em,  bat  infteid  $1000  a  yetr  for  50  yean,  yet  the  koum 
and  tkt  depreciation  fund  taken  together  yield  him  the  I911 
in  pcipetuity,  or  as  long  as  he  keeps  up  the  system. 

In  this  way,  any  article  of  capital  may  be  nuule  to  yield  a 
unifonii  perpetual  income,  not  by  itself,  but  conjointly  with 
a  depreciation  fund.  The  latter  b  often  forgotten.  Only 
by  actually  paying  into  this  fund  can  income  taken  out  be 
made  to  agree  with  interest  accrued.  Merely  to  f«c*<w  what 
the  d^redatim  k  will  not  make  the  income  taken  out  agree 
with  the  interest  accrued.  Reckoning  depreciation  is  as 
poor  a  substitute  for  providing  a  fund  to  meet  depreciation 
as  Beau  Brummel's  keeping  a  dinner  hour  was  a  subititate 
foradinner.  Of  oourae,  <^)ceciation  payments  only  rectify 
ot  diange  the  distribution  in  time  of  one  man's  income  at  the 
expense  of  some  other  man's  income.  That  is,  every  addi- 
tion and  subtraction  caused  in  the  one  man's  income  fanplfes 
equal  and  opposite  diangea  in  lome  other  man's.  A  banker 
must  be  found  who  is  willing  to  take  the  $85  and  succeeding 
payments  into  the  depredation  fund  and  to  pay  badi 
$18,300  at  the  end  of  50  years. 

Another  and  simpler  method  of  keeping  income  steady 
is  to  take  care  that  one's  capital  shall  consist  of  a  large 
mmiber  of  instnunents  at  different  stages  of  production  or 
consumption.  If  a  weaving  mill  is  equqyped  with  twenty 
looott  ai  the  same  degree  ot  wear,  Urn  value  of  this  plant 
will  evidently  diminish,  and  a  depreciation  fund  may  be 
necessary.  But  if  the  twenty  looms  are  evenly  distributed 
throughout  the  different  stages  of  wear,  and  ii  we  aasunw 
that  one  kwm  wean  out  eacb  year  aiMi  is  iqilaoed  at  a 
regular  cost,  no  depreciation  fund  will  be  necessary.  The 
replacement  of  one  loom  annually  is  equivalent  to  such  a 
depreciation  fund,  and  the  capital  r  lereby  maintained  at  a 
unifotm  level  This  method,  whkte  consisto  in  properfy 
assorting  and  combining  a  large  ntmiber  of  instruments, 
is  the  chief  reliance  for  steadying  the  income  of  society  as 
a  whole,  for  to  sodety  as  a  whole  pur^  shifting  devices, 


•odi  as  boRoiHBg,  tie  fampplicmble,  rinoe  lodety  am  find 

no  outside  party  on  whom  to  shift  the  fluctuations. 

In  a  new  country  just  being  qxned  up,  such  as  the 
early  American  colonies,  little  income  can  at  first  be  ob- 
taiiuMl  becaine  ahnoft  aU  the  irtodk  of  wealth,  especially 
the  land,  is,  with  respect  to  abUity  to  yield  income,  in  an 
embryonic  stage,  so  to  speak.  The  first  settlers  must,  there- 
fore, wait  several  years  before  they  can  get  a  comfortable 
living.  An  older  country,  on  the  other  hand,  ludi  as  the 
United  States  to-day,  will  have  its  capital  better  assorted. 
Only  part  of  its  capital  will  be  in  the  embryonic  stage  — 
young  forests,  new  mines,  railways  in  process  of  construe^ 
tioiL  Other  capital  wiD  be  in  full  operation,  yielding  a  large 
stream  of  benefits  —  older  fmeats,  miBe^  cafiwayi,  lir^^n^, 
faxaa,  dwellingi^  etc 

S  5-  The  Risk  Element 

There  is  one  important  feature  in  the  relation  between 
capital-value  and  income-value  which  has  not  yet  been 
mentioned.  This  b  the  lut  that  at  any  point  of  time  wiieii 
we  take  account  of  capital-value,  the  future  meome  fRW 
which  it  is  obtained  is  only  imperfectly  foreknown.  The 
capital-value  is  the  discounted  value  of  the  future  expected 
iBoome,  with  all  the  diaaoes  tA  km  or  gain  handed  in  pres- 
ent expectations. 

Hitherto  we  have  assumed  that  the  entire  future  history 
of  the  capital  in  question  is  definitely  known  in  advance ; 
hi  other  words,  we  have  ignmd  dbnev.  The  articles  of 
capital  which  were  taken  for  illustration  were  suj^XMed  to 
yield  definite  future  income  which  could  be  counted  upon,  pre- 
cisely as  the  interest  pajrments  on  a  bond  may  be  coimted  <m 
by  the  bondholder.  But  as  every  enterprise  offers  chances 
of  both  gain  and  loss,  we  cannot  dose  our  discussion  of  the 
relation  of  income  to  capital  without  somt  yy^mt  of  how 
these  chances  affect  the  matter. 


ted 


It  bas  been  oplaiiied  that  capital-vahie  iacceues  with 

the  ^^)roach  of  an  acn.' ipated  installmott  of  kwMM,  aadl 
diminiahes  when  that  installment  is  taken  out  or  received. 
These  changes  in  capital-value  take  place  when  the  future  in- 
oooM  is  regarded  as  certain.  The  introduction  of  the  ele- 
ment of  chance  will  btb^  other  and  even  more  hnportant 
changes  in  capital-value.  If  we  take  the  history  of  the  prices 
of  stocks  and  bonds,  we  shall  find  it  to  consist  chiefly  of  a 
noord  ci  changing  estimates  due  to  what  is  called  chance, 
rather  than  of  a  reootd  of  the  fordcnown  approadi  and  de- 
tachment of  income.  Few,  if  any,  future  events  are  entirely 
free  from  uncertainty.  In  fact,  property,  by  its  very  defi- 
nition,  is  simply  the  rig^t  to  more  or  less  probable  future 
benefits.  The  owner  of  a  ndoe  takei  hfa  g^Mwrti  •§  to  what 
the  mine  will  yield ;  the  owner  of  an  orange  plantation  in 
Fbrida  takes  his  risk  of  winter  frosts ;  the  owner  of  a  farm 
asBoiiies  rbks  as  to  the  effect  of  sun  and  rain  and  other 
meteorological  conditions,  as  weU  as  the  rbks  ct  the  ravages 
of  fife,  insects,  and  pests  generally.  In  buying  an  overcoat 
a  man  takes  some  risk  as  to  its  effectiveness  in  excluding 
odd,  and  as  to  the  length  of  time  it  will  omtinue  to  be  ser- 
irioeabfe.  Even  what  are  called  "  gilt-edged  "  secniitiM  are 
Bot  entirely  free  from  risk.  Strictly  speakini^  Hmdkm, 
every  owner  of  property  is  a  risk  bearer. 

We  may  now  take  a  bird's-eye  view  of  the  capital  and 
faioone  of  any  country,  such  as  the  United  States.  We 
have  seen  that  the  cajHtal  of  the  United  States  consists  of 
over  a  hundred  billion  dollars'  woiLh  of  articles  of  various 
kind^  nK»tly  real  estate,  and  that  the  income  consuls  of 
several  billion  dollars'  worth  of  nomiahmemt,  fM^^wg, 
ter,  and  other  satbf actions.  We  now  see  how  the  capital 
is  related  to  the  income.  AH  income  comes  from  capital 
(in  its  broada  sense)  whether,  as  is  frequently  the  case, 
the  capital  is  a  human  being,  or  some  otlur  form  ti  wealth. 
The  income  produced  by  capital  gives  value  to  that  capital ; 
for  instance,  the  fruit  borne  by  a  tree  gives  vahie  to  the  tree. 


BuuncM  men  iddmn  aisign  vahw  to  human  beings  by 
cnfrftalizing  their  earning  power,  although  statisticfaat  oc- 
casionally do  this.  But  other  forms  of  capital  are  com- 
monly valued  by  capitalizing  the  income  wUch  they  yield, 
that  is,  the  one  hundred  aiMl  M  faOHoas  of  diaSbn  wbSA 
our  national  capital  is  worth  npmait  merely  the  discounted 
value  of  the  nation's  net  future  satisfaction  which,  it  is 
e3q)ected,  that  capital  will  ultimately  produce.  The  value 
of  our  capital  is  merely  the  present  vahte  of  the  future 
"  living  "  of  ourselves  and  our  descendants.  Most  of  the 
capital  does  not  directly  produce  that  "  living  "  —  does 
not  turn  out  bread  and  butter  ready-made ;  but  contributes 
to  it  only  indirectly  —  by  growing  the  irbmt  wtkh  wffl  be 
made  into  bread  or  pasturing  the  cows  from  whos*:  milk  the 
butter  will  be  churned.  But  all  of  the  capital  has  as  the 
goal  toward  which  its  services  aim  the  production  of  bread 
and  butter  and  the  other  necesdtks,  contorts,  and  amuse- 
ments of  life  the  enjogrment  of  which  constitutes  oiu*  "  liv- 
ing "  or  real  income ;  and  each  individual  article  of  this 
capital  derives  its  value  from  the  value  of  the  services  it 
is  expected  to  loider  In  helfong  towaid  this  ji^.  Hiese 
expectations  xoMy  never  be  realised,'  and  often  are  not  real- 
ized, or  the  expectations  may  be  surpassed  by  realization. 
But  in  either  case  it  is  e]q>ectation  and  not  realization  which 
ghres^vahie  to  capital;  and  any  diange  in  eipectatioiis, 
iriMthor  occasioped  by  a  shock  to  business  confidence,  a 
rumor  of  war,  or  any  other  caaie,  wiU  tend  to  chaafB  the 
value  of  our  national  capital. 

§  C  KiOVlMf 

The  preceding  chapters  are  intended  to  give  a  definite 
picture  ot  the  ma«  <k  capital  and  its  beoefits  to  man.  Ja 

such  a  picture  we  see  man  standing  in  the  midst  <A  a 
physical  universe ;  the  events  of  this  universe  affect  his  life 
favorably  or  unfavorably.   Over  many  of  these  events  he 


men 


can  exercise  no  cuntrd  or  selection;  they  o»stitute  hb 
natural  environm—t.  Over  others  he  caetdset  ■ricctioa 

•ad  control  by  assuming  dominion  over  part  of  the  physical 
universe  and  fashioning  it  to  suit  his  own  needs.  The  parts 
of  the  material  world  which  he  thus  appropriates  consti- 
tute wealth,  idietlier  they  remafai  in  thdr  natural  state  or 
are  "  worked  up  "  by  him  into  products  to  render  them  more 
suitable  to  his  needs.  This  mass  of  instruments  will  con- 
sist, first,  of  the  appropriated  parts  of  the  surface  of  the 
earth,  the  buildings  and  structures  attend  to  the  aofl,  and 
the  movable  objects  or  "commodities"  which  man  possesses 
and  stores  up;  and,  secondly  (if  we  take  wealth  hi  its 
broader  sense),  of  hiunan  beings. 

Thit  mass  of  htttniments  serves  man's  parpoae  fai  so  far 
as  its  possession  enables  him  to  modify  the  stream  of  occur- 
rences. By  means  of  land  and  the  modifications  to  which 
he  subjects  it  he  is  enabled  to  increase  and  improve  the 
frowth  of  the  vegetaUe  and  animal  U^cdoms  in  such  a  my 
it  to  sui^ly  him  with  food  and  the  materials  for  constructing 
other  instnmients.  By  means  of  dwellings  and  other  build- 
ings he  is  enabled  to  avert  or  minimiy,e  the  unf avoraUe 
eflicto  of  the  elements  upon  his  body  and  upon  the  artides 
ol  wealth  which  he  scores  in  those  buildings.  By  means  of 
machinery,  tools.  <ind  other  instruments  of  production,  he 
is  enabled  to  v  hie  r  new  instruments,  to  add  to  his  store  of 
goods  or  to  su|^y  the  place  of  those  destroyed  or  worn  out. 
By  Beam  of  the  final  finished  products  which  minister  to  his 
more  imr  .diate  er  joyments  —  such,  for  instance,  as  food, 
clothing,  books,  ornaments  —  he  is  enabled  to  consummate 
the  purposes  for  wM^  the  entire  mass  of  wealth  is  produced 
and  kept  in  existence;  namely,  the  satisfaction  of  his 
d  sires,  whether  these  be  for  the  necessities,  the  comforts, 
the  luxuries,  or  the  amusements  of  life.  In  these  and 
other  ways  the  sUx^  of  wealth  will  modify  the  coarse  of 
natural  events  in  a  manner  more  or  less  agneaUe  to  the 
owner.  These  denraUe  changes  hn  the  ttimm  of  eveati 


^  7 


143       XLUNTAXT  WMBHanMM  OOP  SCXJMOMICB  |CiU».V]l 

whidi  occur  by  means  of  wealth  constitute  the  benefits 
ci  wealth. 

But  these  benefits  are  obtained  by  dint  of  certain  costs. 
In  the  last  analysis,  costs  are  simply  human  efforts,  and 
benefits  are  simply  human  satisfactions ;  but  the  interval  be- 
tween efforts  and  satisfactions  is  divided  into  so  many  stages, 
and  at  each  of  these  stages  there  are  so  many  prooenes  of 
production  or  exchange,  that  these  intermediate  occurrences, 
or  interactions,  are  much  more  in  evidence  than  either  the 
efforts  whidi  precede  than  or  the  satisfactions  which  follow. 
Each  interaction  is  accounted  as  a  benefit  with  respect  to 
the  producing  article  or  agent,  and  a  cost  with  respect  to 
that  on  account  of  which  it  occurs. 

The  wlKde  economic  structure  ibetdate — ail  that  b 
represented  in  capital  and  income  accounts  —  rests  on  two 
ultimate  elements,  namely,  efforts  and  satisfactions.  These 
enter  our  accounts,  transformed  simply  by  means  of  factors 
called  prices,  including  that  important  j^ce  called  the  rate 
of  interest.  By  means  of  such  price  factors,  we  reach 
from  these  elements,  first,  the  interactions  which  depend 
on  them,  then  the  complete  income  and  outgo  accounts 
(containing  the  vahies  not  <Hily  d(  intmctkms,  but  of  ef- 
forts and  satisfactions  as  well),  and  then  the  capital  ac- 
counts (containing  the  discounted  values  of  the  items  in.  the 
income  accounts). 

To  recapitukte  in  a  few  wcrnls  tte  nature  oi  capital  and 
income,  we  may  now  say  that  those  parts  of  the  matoial  imi- 
vme  which  at  any  time  are  under  the  domiraon  of  man, 
constitute  his  capital-wealth;  its  ownership,  his  capital- 
property;  its  value,  his  cafutal-value.  Capital-vah»  im- 
plies  anticipated  income,  which  omsists  of  a  stream  of  bene- 
fits or  its  value.  When  values  are  considered,  the  causal 
relation  is  not  from  capital  to  income,  but  from  income  to 
capitd;  not  from  present  to  fature,  but  from  future  to pi«»> 
cnt  In  other  words,  the  value  of  capital  is  the  discounted 
vahit  ol  the  *^pf*^*<^  inowiifti  The  fluctuatioos  of  tUi 


8BC.4I 


vAUAimn  or  moomt 


»43 


capital-value  will,  barring  chance,  be  equal  and  opposite  to 
the  divergencies  of  "  income  taken  out "  from  "interest  ac- 
cnied."  When  the  fc*<iM*iirn  of  dianoe  b  fadndwi,  Hmn 
win  be  in  addition  to  these  fluctuations  still  others  which 
mirror  the  successive  changes  in  the  outlook  for  future 
income. 


CHAPTER  Vm 


mNapuEs  oovnmNO  xbb  fdbchasimo  vownt  ov  mma 

Z.  aHuvwntfiM/ 

We  have  now  finished  the  first  gr«it  division  of  our  sab- 
ject  —  a  study  cS  the  foundation  stones  ci  Eam<»nics  and 
how  they  fit  together.  These  foundaticm  stones  an  wealth, 
property,  benefits,  costs,  capital,  and  income.  Our  study 
has  so  far  consisted  in  pointing  out  the  nature  and  rela- 
tioiis  between  these  various  concepts,  and  particularly  be- 
tween capital  and  income. 

All  of  these  relations  find  expression  by  means  of  prices. 
By  prices,  as  we  have  seen,  a  miscellaneous  collection  of 
goods  may  be  trandated  hito  a  homogeneous  mass  of  money- 
values.  Only  by  sodh  ndacfSaa  to  a  common  money  hmkt 
are  capital  and  income  accounts  possible.  Capital  account 
and  income  accounts  are  groups  of  heterogeneous  dementsie- 
duced  to  common  terms  mans  of  jmces.  ^t  in  all  the 
capital  and  income  accounto  to  iHiich  reference  has  thus  far 
been  made,  and  in  all  our  previous  discussions,  we  have 
taken  prices  for  granted.  We  have,  in  other  words,  started 
OBt  in  Qor  kvcrti^tions  opon  &m  aasamptium  that  pAm 
woe  find  and  Imown.  But  inasmuch  as-pdces 
are  the  outcome  of  economic  forces,  they  must  in  tton  be 
made  the  subject  of  analysis,  and  we  must  wmKfom^ 
BOW  take  the  second  part  d  am  tadc,  iHddi  eonriste  ai 
diacoveriBg  the  principles  that  determine  prices. 

U  ooe  woe  to  adt  hem  the  jaUx  el  n^eat  ia  iIi  ImimiiiT, 


•n4 


fount  OP  Momy 


the  immediate  answer  would  probably  be :  By  supply  and 
demand.  TUs  answer,  thou^^  correct  so  for  as  it  goes,  is 
iMpsffirial.  It  is  wdl  to  be  on  one's  guard  against  glS> 
phrases  wbich  are  so  often  substituted  for  real  analyses. 
"  Supply  and  demand  "  is  such  a  phrase.  A  long  time  ago, 
when  econoaycs  conwityd  rather  <rf  glib  phrases  than  ol  nil 
analyses,  a  dUk  ol  the  stod^  mM,  **  U  you  want  to  anka 
a  first-class  economist,  catch  a  parrot  and  teach  him  to  say 
'  supply  and  donand'  in  reaponse  to  every  question  you 
ask  him.  What  detenafaea  wages?  Supply  aad  <temaBd. 
What  determines  the  distrflbrtiwi^  wealth?  Supply  aad 
demand."  In  every  instance  the  answer  is  right,  but  it 
p^ftin*  nothing.  We  mast  discover  the  forces  which 
detemdne  suj^y  ad  dnand.  fit  so  donq;  we  diaH  leam 
that  to  determine  the  price  even  of  one  simple  commodity, 

science. 

We  are  now  ready  to  tiiidertake--iiot  dtt  Ml  Arfgr  of 
^  wapffy  and  demand  of  any  article  —  but  one  of  the  im- 
portant forces  underljring  the  siq^y  and  (kmand  of  aU 
artides.  That  force  is  the  pwchaiimg  pmmtr  money,  a 
fsne  as  siditle  as  k  is  oaaaipraMit  As  mof  pirn  is  es> 
piWii  hi  mcMiey,  it  is  evidnt  ftat  the  wffibjg;iHss  to  take 
or  give  a  certain  amount  of  any  article  at  a  given  price  in 
mcHiey  dqiends  on  the  willingaess  to  ghre  or  take  a  ortain 
amoimt  cA  mmtey  in  tarhsngr.  'EHa  wffiigasHi  to  ^ve  or 
take  money  depends^HMllapiidlHiiCpnMrcrf  money  over 
<^her  things.  Will  a  man  pay  ten  cents  for  a  poimd  of  sugar? 
That  dq)ends  on  whether  or  he  wants  the  moae 
thaa  something  else  jMirdaHUe  wMi  ^  ten  CMMfc  'Ae 
aum^la  other  woids,  balances  in  )m  mind  the  sag^Nnd  tilM 
money  —  the  latter  standing  in  his  mind  for  any  goods  he 
could  spend  it  lor.  If  the  purchasing  power  of  mtmey  is 
high,  he  wiB  coaeeive  so  h^  a  mgmd  iat  wmey  aa  t»ia 
rductant  to  part  with  a  given  amoi^  of  it  for  a  givcB  quu- 

a 


.  I. 


146    nnmrrAiY  ruMciKss  ot  iooiioiiicb  tpum.  vm 

for  sugar.  The  seller,  on  the  other  hand,  is  more  eager  to 
take  a  unit  of  money  when  it  has  a  high  purchasing  power, 
<4.,lieitmovewffingtotakealowi»ioefor  81^.  Hence, 
tf  In  a  given  year  money  has  a  high  purchasing  power,  the 
price  of  sugar  will  be  low.  We  see  then  that  the  price  of 
any  particular  article  will  tend  to  be  low  if  money  has  a  hin^ 
pMdUmng  power;  that  u,  if  the  prices  of  artkks  im  gtmrti 
are  low.  It  is  therefore  dear  that  the  money  price  of  every 
particular  commodity  depends  partly  on  the  prices  of  other 
commodiHes,  i.e.,  on  the  general  level  of  prices ;  just  as  the 
•etttdhe^tmeM  by  a  particular  waved  the  sea  depends 
partly  on  the  pneral  level  of  the  tides,  or  as  the  actual 
height  <rf  a  spire  depends  oa  tbe  ekwatioQ  ol  the  fRMind 
mi  which  it  stands. 

Thephraatt"fliepttgcfcarfngpoinM  of  money  "  Mid  "  the 
goieral  levd  of  prices  "  are  redinocal.  To  say  that  the  pw^* 
chasing  power  of  money  is  high  or  low  is  the  same  thiag  as  to 
say  that  the  general  level  of  prices  is  low  or  high,  respec- 
tivdy.  H  the  price  level  is  douUMl,  tlw  purdMfiing  power 
of  money  will  be  halved,  and  vk$  wma. 

It  is  possible  to  study  the  general  level  of  prices  inde- 
pesdently  of  particular  prices,  just  as  it  is  possible  to  study 
tfwpMirt  M»ef  Ae«eeiB  hi<kptDdait}y  <tf  its  partScdtf 
nftves.  Moreover,  it  is  not  only  wuon  logical  to  study  the 
general  price  level  hr§t,  but  this  aider  <rf  study  has  also  the 
advantage  of  irqiiMfing  us  aa  eariy  as  peasiUe  with  tlie 

•MB  tfw  pteS  wlieat  ii  [  ^"P?^ 

the  study  of  prices  in  general, 
in  pra^ice,  mon^  it  a  swet  omvenie&t  device,  but  im 
ft  fi  ttmmft  a  iMMivi^M  U  #le  nwAml  of 

lies,  who  is  exceetfii^y  prone  to  nusunderstaad  Utt 
faadimis.  At  the  beginnmg  of  this  boc*  we  pointed  out 
some  of  the  imagimed  fimctions  o(  moae-/  that  do  not 
toit  Weimmmkk% 


•n.4 


Ml 


S  a.  Tht  Hatar*  of  IfiMf 

We  define  money  as  goods  generally  acceptable  in  exchami 
for  other  goods.  The  facility  with  which  it  may  thus  be  ex- 
changed, or  its  general  acceptability,  is  the  chief  character- 
istic of  money.  The  general  acoqytability  may  be  refoforced 
by  law,  the  money  thus  becoming  "legal  tender  "  («.«.,  money 
which  may  be  legaUy  tendered  or  offered  by  a  debtor  to  his 
creditor  as  a  means  of  discharging  his  obligations  eipresaed 
in  terms  of  money  units  and  lAJdi  the  creditar  must 
accq)t).  But  such  reenforcenmt  b  iK>t  csMtttfad.  Att 
that  is  necessary  in  order  that  any  good  may  be  money 
is  that  general  acceptability  shall  attach  to  it.  On  the 
fnmtiar,  without  any  legal  sancticn,  money  is  wacaiAkom 
gdd  dust  or  gold  nuggets.  In  the  colony  of  Virginia  it 
was  tobacco.  Among  the  Indians  in  New  £n|^ba4  it  mm 
wampum. 

How  does  it  hqppen  that  any  particular  commodity 
comei  into  use  a*  money?    Not  ori^na%  because  ft 

government  so  decreed,  but  because  the  commodity  was 
very  salable  for  otho:  uses  than  money  and  could  be  readily 
rmM.  Thus  fsM  was  readily  sold  and  resdd.  MaiQr 
wanted  it  for  jewelry,  and  many  others  could  easily  be 
induced  to  accept  it  in  exchange,  even  if  they  had  no 
persMud  use  for  it  themselves,  for  they  knew  they  could 
leaell  ft  at  any  time  to  some  one  wlio  had  sudi  a  me  Sor 
ft.  OndBaiBf  ft  beeaaw  fuetomaiy  to  accept  ft  no 
thought  of  any  other  use  than  to  resell  it  or  pass  it 
<»i  indefinitely.  Gdd  has  finally  survived  as  the  most  im- 
por^t  fonn  of  maoey.  U  is  eai&y  tranqxyrtable  and  is 
durable. 

There  are  various  degrees  of  exchangeability  which  must 
be  transcended  bdore  we  arrive  at  real  money.  Of  all  kinds 
of  goods,  (Hie  of  ^  least  eadbangsabk  if  real  estate.  Itll 
oflM  difficult  to  find  a  posoft  «to  imi^  to  iMty  a  pur^^ 


Z48      SLBMIllTAnr  RIMCIfUS  OV 


more  exchaogeatde.  Yet  even  a  mortgage  is  less  exchange- 
able  than  a  well-known  and  safe  corporatkm  tuauity,  or 
a  government  bond.  One  degree  more  exchangeable  tHum 
a  government  bond  is  a  time  bill  of  exchange ;  one  degree 
more  exchangeable  than  a  time  bill  ol  exchange  is  a  sight 
draft;  while  a  cfaedc  is  i^mott  m  "v^rmipnW  as  mamir 
itself.  Yet  no  one  of  these  is  mi3fy  SMttQr,  inr  aont  flf 
them  is  "  generally  acceptable." 

If  we  confine  our  attention  to  pntMit  and  normal  condi- 
tkms,  and  to  those  means  «f  caekMge  whidi  ekktx  are 
money  or  most  nearly  approximate  it,  we  shall  find  that 
money  itself  belongs  to  a  general  class  of  goods  which  we  may 
call  "  currency  "  or  "  circulating  media."  Currency  may 
be  any  kind  of  gooda  which,  Mfctliw  gBnciaBy  aacptehfc 
or  not,  do  actually,  fmr  timr  tMd  p^pHe  and  oae, icnvM 
a  means  of  exchange. 

Currency  consists  of  two  chi^  classes:  (i)  money;  (2) 
bank  dqMsits,  iHddi  win  be  tmm/bBi  ttSfy  ha.  the  aoEt  dM^ 
ter.  By  means  of  checks,  bank  deposits  serve  as  a  means  of 
payment  in  exchange  for  other  goods.  A  check  is  the  evi- 
dence of  the  transfer  of  bank  dqwiits.  It  is  acceptable  to 
the  payee  01%  by  Ma  luiiit.  Il'  wmM  Mt  he  pMH% 
accepted  by  strangers.  Yet  by  chedo,  trnxk  dqMilft,  ew 
more  than  mcmey,  do  actually  serve  as  a  medium  of  ex- 
change. In  this  country  bank  deposits  »ibject  to  check,  or, 
w thQT ue-«neliM» called,  "ikpoak oneBef," mtbfkg 
the  most  important  kind  of  currou^  or  drctdating  mecMa. 

But  although  a  bank  deposit  tran^erable  by  check  k 
included  in  circulating  media,  it  is  not  nwney.  A  bulk  Mir, 
on  the  other  htad,  is  batfi  rin^^il^■^  meim  Mi  momj. 
Between  tiwae  two  lies  the  final  line  of  distinction  separat- 
ing what  is  money  and  what  is  not.  The  line  is  delicately 
drawn,  especially  in  the  case  ol  such  checks  as  cashier's 
cMb  ot  certliBd  dbadm,  Wm  Ae  Mtm  mm  satMrnlf 
similar,  in  respect  to  acceptafaSty,t»  kutk  MlBS.  Each  is 
m^KBMKaAJitkiii^  on  a  faNk,  MMl€MllMiiillP€B  tiw  boMv 


tK4 


the  right  to  draw  money.  Yet  whik  a  bank  note  is  gfineraliy 
aeeipiribtefa  —diange,  a  chedt  fa  ■cc<ptihh  only  by  spttM 
consent  of  the  payee.  Real  numey  is  what  a  payee  accqpts 
without  question,  because  he  is  induced  to  do  so  1^  "  kgy 
tender  "  laws  or  by  a  well-estaUished  custom. 

Of  real  money  tiMne  are  two  khids:  primary  and  idn- 
duy.  Money  is  called  primary  if  it  is  a  commonly  MSUf 
given  unit  o(  which  has  just  as  much  value  in  some  use 
other  than  moiey  as  it  has  in  mtmetary  use;  that  is, 
piiMury  mamf  fa  a  oooHBodky  wbkik  hM  ill  6dl  vahie 
even  if  it  is  not  used  as  money  or  m/m  tf  ft  fa  Ranged  to 
a  fwm  in  which  it  will  not  CTculate  as  money.  For  in- 
gold  coins  u  the  Uaked  States  are  primary  money, 
fbtdr  rtfrn  nS  %e  tti#aaMriMd  even  if  they  are 
into  gold  bullion,  li  fiw  same  way,  the  tobacco 
money  of  Virginia  in  old  days  was  primary,  having  as  much 
vahie  as  tobacco  as  it  had  as  mooey.  Fiduciary  money, 
m  tf»  ote  lHa4fa  moaey  the  w^m  if  wUdi  depends 
liettiji  or  wholly  m  the  mmm^m  tmMmct  that  he  can  ez- 
chiuige  it  for  primary  money,  or  at  any  rate  Iw  other  goods, 
for  primuy  mooey  at  a  bank  or  pMMBwnt  office  or  for 
'  el  iifcii  er  fiiirliew  ci  gooA  el  mwdaMs.  For 
a  tltm  4eflar  in  the  United  Stmm  fa  iteciaiy 
money,  Mnce  it  k  worth  a  dollar  only  because  of  the  public 
coi^Mence  that  the  government  irii  take  it  in  taxes  and  the 
fMffe  ii  dftKsharge  of  ddbii  wmi  for  other  purposes  ett  equal 
%mm  with  a  dollar  of  gdd.  If  a  sflver  dollar  be  melted 
into  bullion,  it  wfll,  unlike  the  gold  dollar.  lose  a  large  part 
of  its  vaJue.  That  is,  the  bu^  in  a  aiver  doUar  fa  not 
#siifc  ft  Mv;  ft  fa  miy  woeA  about  forty  ocats.  €l«r 
other  liver  cofaw  a»  wrth  ae  WKon  even  less  m  pwpor- 
tioB  to  tfccfa  vakie  as  money,  and  our  nickel  and  bronze  coins 
MC  wmtk  kis  m  pcopcHrtiMi.  Bank  notes,  govonment 
flllM^  iMi  ottsr  Ihm  el  p^w  MM|r  eee  still  ftHie  striking 
of  fiduciary  mooey,  ^ 


ISO    XLmBisiiy  nncDus  or  ■oowiomM  fQu».viii 


fidenoe  tluit  they  can  be  exchanged  for  gold  at  the  banks  or 
the  govemmeut  treasury.  The  larger  part  of  the  money  in 
use  in  the  United  States  is  fiduciary  money,  the  chfaf  ex- 
amples being  silver  dollars,  fractional  silver,  minor  coins, 
silver  certificates,  gold  certificates,  government  notes  (nick- 
mmed ''graenbMks'O)  and  bank  notes.  The  exact  nature 
of  these  various  kinds  of  money  constitutes  a  subject  oatMt 
the  purpose  of  this  book.  The  student  can,  however,  learn 
much  as  to  their  nature  for  himself,  by  reading  the  inscrip- 
tions on  the  various  fonan  oi  money,  which,  from  time  to 
time,  pass  through  his  hamk.* 

The  qualities  of  primary  money  which  make  for  exchange- 
ability are  numerous.  The  most  important  are  portability, 

durability,  and  divisibil- 
ity. The  chief  quality  of 
fiduciary  money,  which 
makes  it  exchangeable,  is 
its  redeemability  in  pri- 
mary money,  or  dae  its 
imposed  character  of 
"legal  tender." 

Figure  9  indicates  the 
classificatfan  of  all  drcu- 
lating  media  in  the 
United  States.   It  shows 
that  the  total  amovmt  of 
drcuktiiif  medb  is  about 
eight  and  one  half  bil- 
lions, of  which  about  seven  bUlicms  are  bank  deposits  sub- 
ject to  check,  and  one  and  one  half  billions,  money;  and 
that  of  this  one  and  one  half  himont  of  money  one  bfflioa  b 

•Some  eeoBoalrts  have  propoaed  that  what  it  here  called  "  fidudary " 
money  should  not  be  called  money  at  all ;  that  ia,  that  the  term  "  money  " 
■bould  be  resuicted  to  primaiy  BKHuy.  It  Meui  pidenfaie,  however,  hei* 
MaiMiHM»,teiDloirMfiBtqrM|p.  Thmaitl 
Imp*  iw  •  flfMiirtwpiBMuv  flHir,  bat  < 


BANK 
DEPOSITS. 


riOUCMRY 
MONEY 


rMONCY. 

jauJoN. 


ONE 

IHJUONl 


SEVEN 
BILUONS. 


Aft.  «. 


Slcd  PUICRASINO  POWER  Of  MOMSy  l|l 

fidudaiy  moniy  $ad  oafy  about  htlf  «  UBkm  priaaqr 

money. 

In  the  present  chapter  we  shall  eidttde  the  ooukkratkm 
€i  bank  deposit  or  check  dfcidatioa  and  confine  our  atten- 
tion to  the  circulation  of  money,  primaiy  and  fiduciary.  In 
the  United  States,  the  only  primary  mraey  is  gold  coin. 
The  fiduciary  money  includes  token  ooina  and  paper  money. 

CSiecksaskle,  we  may  cUasify  exchanges  into  threegroqia: 
the  exchange  of  goods  against  goods,  or  barter ;  the  ezchanfa 
of  money  against  money,  or  "  changing  "  money;  and  t^ 
exchange  of  money  against  goods,  or  purchase  and  saU. 
Only  th'v  last-named  sptda  of  exchange  involves  ¥^yit  Wb 
call  the  circulation  of  money.  The  circulation  of  mooagr 
signifies,  therefore,  the  aggregate  amount  of  its  transfen 
against  goods.  M  mcmey  held  iot  drculatioD,  i^.,  for 
use  in  payment  for  goods  purchased  is  csUod  mtey  in 
circulation.  This  includes  the  money  in  the  pK^ckets  anu 
purses  of  the  pec^e  or  the  tills  and  safes  of  merchants.  In 
the  United  States  this  indudes  all  money  except  what  is  hi 
v^^]p^  4Hf  and  of  thg  Uirftod  Stattt  giBTniiininnt;. 

I  $.  Th»  Squation  of  Bxshaaft  ArithmatteaUy  MMftmmi 

Having  learned  something  of  the  nature  of  mon^,  w« 

are  ready  to  study  the  causes  which  determine  the  pur- 
chasing power  of  money ;  in  other  words,  the  causes  which 
determine  the  general  level  of  prices. 

H  we  overlook  for  the  present  the  influence  of  chedcs,  we 
may  say  that  the  price  level  depends  on  only  three  sets  of 
causes:  (i)  the  quantity  of  money  in  circulation;  (a)  its 
"  efficiency  "  or  velocity  of  circulation  (or  the  average  num- 
ber of  tones  a  year  a  doBar  is  exchanged  for  goods) ;  and  (^) 
the  volume  of  trade  (or  amount  of  goods  per  year  bought  by 
money).  The  so-called  "  quantity  theory  "  (».«.,  the  theory 
that  pricea  vary  iwoportionally  to  money)  haa  often  bear 


the  level  of  prices  varies  directly  with  the  quantity  of 
mmty  in  circulation,  provided  the  velocity  of  drculation  of 

tiutt  monqr  and  the  irakiiM  ol  tnde  dbctod  by  meut  of  it 

are  not  changed.  This  theory  will  be  made  clearer  by  th» 
equation  of  exchange,  which  is  now  to  be  explained. 

The  fpu^ti<|tiy  nf  i.yr)j|n|^  u  a  Statement,  in  mathematical 
ionn,  of  tht  total  tniiMctioM  dfected  bk  a  certaiD  period 

in  a  given  community.  It  ii  obtained  simply  by  »An^ 
together  the  equations  of  exchange  for  all  individual  trans- 
actions. Suppose,  for  instance,  that  a  person  buys  lo 
poiffids  of  sugar  at  7  cents  per  pound.  TUi  is  aa  catchange 
tnnsaction,  in  which  lo  poimds  of  sugar  have  been  icgaided 
•1  equivalent  to  70  cents,  and  this  fact  may  be  expressed 
thus :  70  cents  -  10  pounds  of  sugar  multiplied  by  7  cents 
a  pound.  Every  other  sale  and  purchase  may  be  apresied 
similarly,  and  by  adding  them  all  together  we  get  the  equa- 
tion of  exchange  for  a  cerujn  period  in  a  given  community; 
that  is,  the  left  side  represents  all  the  money  spent  and 
the  right  represents  the  vahie  of  aO  goods  bought  within 
the  given  period.  During  this  period,  howovw,  the  $am 
money  may  serve,  and  U3ually  doqs  serve,  for  seccral  trans- 
acticms.  For  that  reason  the  left  or  money  side  of  the 
equation  is,  of  course,  greater  than  the  total  amount  of 
money  in  drculation. 

The  equation  has  a  goods  side  and  a  money  side.  The 
m(mey  »de  is  the  total  money  exchanged,  and  may  be  con- 
sidered as  the  imdttct  of  the  quantity  of  money  mult^iBed 
by  the  rapidity  of  its  circulation,  i.e.,  the  number  of  times  it 
is  exchanged  for  goods.  This  important  magnitude,  called 
the  vdodty  oi  drculation  or  rapidity  of  turnover,  means 
sin^y  the  quotient  obtained  by  dfv&ifa^  th«  total  mon^ 
payments  for  goods  in  the  course  of  a  year  by  the  average 
amount  in  drculation  by  which  these  payments  are  eflFected. 
TWs  vdodty  of  drculation  in  an  entire  conununity  is  a  sort 
of  average  of  tht  rates  of  turnover  of  diffeient  peiaona. 
Each  person  has  his  own  rate  oi  turaovor  wUdb  he  can 


tM;4  fUMXAmO  ffOIVU  Of  MOMSV 


readfly  calculate  by  dividing  the  amount  of  money  he  ex- 
pends per  year  by  the  average  amount  he  carries.  The 
goods  rfdt  ol  Um  tqufttioa  b  mtde  up  of  the  qiMBtltiM  el 

foods  multiplied  by  their  req>ective  prices. 

Let  us  begin  with  the  money  side.  If  the  number  of 
dollars  in  a  country  is  5,000,000,  and  the  velocity  of  drcu- 
ktion  ct  these  doOan  is  twenty  tfanee  per  yeer,  tiben  the 
total  amount  of  money  expended  (for  goods)  during  any 
year  is  $5,000,000  times  twenty,  or  |xoo,ooo,ooa  This  b 
the  money  side  of  the  equation  of  exchange. 

Snoe  the  monqr  side  of  the  equation  k  iMoo,ooo,ooo,  the 
goods  side  must  be  the  same.  For  if  $100,000,000  has  been 
spent  for  goods  in  the  course  of  the  year,  then  $100,000,000 
worth  of  goods  must  have  been  sold  in  that  year.  In  order 
to  avoid  the  neoeirity  of  writing  oat  the  quantitiet  and 
piket  of  the  innumerable  varieties  of  goods  which  are  actu- 
aUy  exchanged,  let  us  assume  for  the  present  that  there  are 
only  three  kinds  of  goods  — bread,  coal,  and  doth;  and 
that  the  sales  are:  — 

300,000,000  loaves  of  bread  at  $  .10  a  loaf, 
lofioofioo  tone  of  coal     at  5.00  a  ton,  and 
30,000^000  yaids  of  doth  at  1.00  a  ya»L 

The  vahie  of  these  tzamactSom  b  evidently  $100^000,000,  — 
i.e.,  $ao,ooo,ooo  worth  of  bread  plus  $50,000,000  worth  of 
coal  plus  $30,000,000  worth  of  doth.  The  equation  of  ck- 
change,  therefore,  is  as  follows :  — 

$5^000^000X30"  300,000,000  loaves  x  $  .10  a  loaf 
+ 10,000,000  tons  X  5.00  a  ton 
+30,000,000  yards  X  x.ooayaid. 

This  equation  contains  on  the  money  side  two  magnitudes, 
viz.,  (i)  the  quantity  of  money,  and  (2)  the  numbor  of 
timea  it  drcuhUes  or  is  "  tinned  over "  k  a  year;  and 
OBtibefoodssidetiiofrMf^of  nagnitadetin  two  oofaBuia, 


MICROCOPY  RESOLUTION  TEST  CHART 

(ANSI  and  ISO  TEST  CHART  No.  2) 


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jS     (716)  482  -  0300  -  Ptnm 
(716)  288  -  5989  -  Fa» 


154     MJOIEKIABY  nONCIPIES  OF  ECONOIOCS    [Chap.  VIH 


viz.,  (i)  the  quantities  of  goods  exchanged  in  a  year 
(loaves,  tons,  yards),  and  (2)  the  prices  of  these  goods  ($.10 
per  loaf,  $5.00  per  ton,  and  li.co  per  yard).  The  equation 
shows  that  these  four  sets  of  magnitudes  are  mutually  re- 
lated. Because  this  equation  must  be  fulfilled,  the  prices 
must  bear  a  relation  to  the  three  other  sets  of  magnitudes  — 
quantity  of  money,  rapidity  of  circulation,  and  quantities 
of  goods  exchanged.  Consequently,  these  prices  must,  as  a 
whole,  vary  proportionally  with  the  quantity  of  money  and 
with  its  velocity  of  circulation,  and  inversely  with  the  quan- 
tities of  goods  exchanged. 

Suppose,  for  instance,  that  the  quantity  of  money  were 
doubled,  while  its  velocity  of  circulation  and  the  quantity  of 
goods  exchanged  remained  the  same.  Then,  since  the  equa- 
tkm  of  exchange  must  continue  to  hold  true,  it  would  be 
quite  impossible  for  prices  to  remain  undianged.  The 
m«m^  side  would  now  be  $10,000,000  x  20  times  a  year,  or 
$300,000,000;  whereas,  if  prices  should  not  change,  the 
goods  would  remain  $100,000,000  and  the  equation  would 
be  violated.    Since  exchanges,  individually  and  collectively, 
always  involve  an  equivalent  quid  pro  quo,  the  two  sides 
must  be  equal.   Not  only  must  purchases  and  sales  be  equal 
in  amount  — sbce  every  article  bought  by  one  person  is 
necessarily  sold  by  another  —  but  the  total  value  of  goods 
sold  must  equal  the  total  amount  of  money  exchanged. 
Therefore,  under  the  given  conditions,  prices  must  change 
in  such  a  way  as  to  raise  the  goods  side  from  $100,000,000 
to  $300,000,000.  This  doubling  may  be  accomplished  by 
an  even  or  an  uneven  rise  of  prices,  but  some  sort  of  a  rise 
of  prices  there  must  be.   If  the  prices  rise  evenly,  they  will 
evidently  all  be  exactly  doubled,  so  that  the  equation 
wiU  read:  — 

$10,000,000  X  20  -x  200,000,000  loaves  X  $  .20  per  loaf 
+  10,000,000  tons  X  10.00  per  ton 
+  30,000,000  yanb  x  a.ooperyftid. 


Sic  3]  PX7KCHASING  POWER  OF  MOmt  1$$ 

If  the  prices  rise  vinevenly,  the  doubling  must  evidently  be 
brought  about  by  compensation;  if  some  prices  rise  by 
less  than  double,  others  must  rise  by  enou{^  more  than 
double  to  exactly  compensate. 

But  whether  all  prices  increase  imiformly,  each  bdng  ex- 
actly doubled,  or  some  prices  increase  more  and  some  less 
(so  as  still  to  double  the  total  money-value  of  the  goods  pur- 
duoed),  the  inices  ore  doubled  on  the  average.  Tic 's  proposi- 
tion is  usually  expressed  by  saying  that  the  "  general  level 
of  prices  "  is  raised  twofold.  From  the  mere  fact,  therefore, 
that  the  money  spent  for  goods  must  equal  the  quantities  of 
those  goods  mult^ied  by  thdr  prices,  it  follows  that  the  levd 
of  prices  must  rise  or  fall  according  to  changes  in  the  quan- 
tity of  money,  unless  there  are  changes  in  its  velocity  of 
circulation  or  in  the  quantities  of  goods  exchanged. 

If  dumges  in  the  quantity  ol  money  affect  prices,  so  will 
changes  in  the  other  factors  —  quantities  of  goods  and 
velocity  of  circulation  —  affect  prices.  In  the  case  of  a 
change  in  the  velocity  of  circulation,  the  change  is  very  simi- 
lar to  that  weak  in  the  case  of  a  change  in  the  quantity  of 
money.  Thus  a  doubling  in  the  velocity  of  circulation  of 
money  will  double  the  level  of  prices,  provided  the  quantity 
of  money  in  circulation  and  the  quantities  of  goods  es- 
dumged  fur  mox^  ronain  as  before.  The  equatioii  wffl^ 
diange  (from  its  (ni^nal  iaaa)  to  the  fcdlowfaig:  — 

15,000,000  X  40  200,000,000  loaves  X  $  .30  a  loaf 
+  xo,ooo,coo  tons  X  xcooaUm 
4-  30,000,000  yaxdt  X  a.ooayaid; 

or  eke  the  equation  will  assume  a  form  in  which  some  of 
the  prices  will  more  than  double,  and  others  less  than  doubk 
by  enough  to  preserve  the  same  total  value  of  the  sales. 

Again,  a  doubling  in  the  quantities  of  goods  exchanged 
will  cut  in  two  the  height  of  the  price  level,  provided  the 
^tuttttity  of  vstouny  wuA  fts  vdodty  of  drct^ftlJk^  rfTnatn 


X56  '   WLMMKHTAMY  VMmOFLEB  OF  ■OOMOIIICS    [Cktf.  Vm 


the  same.  Under  these  circumstances  the  equation  will 
change  (from  its  original  form)  to :  — 

$5,000,000  X  20=400,000,000  loaves  X  $  -05  a  loaf 
+  20,000,000  tons  X  2.50  a  ton 
+  60,000,000  yards  X    .50  a  yard; 

or  else  it  will  assiune  a  form  m  which  some  of  the  prices  are 
more  than  halved,  and  others  less  than  halved,  so  as  to 

preserve  the  equation. 

Finally,  if  there  is  a  simultaneous  change  m  two  or  all  of 
the  three  influences,  i.e.,  quantity  of  money,  velocity  of 
circulation,  and  quantities  of  goods  exchanged,  the  price 
level  will  be  a  compound  or  resultant  of  these  various  in- 
fluences. If,  for  example,  the  quantity  of  money  is  doubled, 
and  its  velocity  of  circulation  is  halved,  while  the  quantity 
of  goods  exchanged  remains  constant,  the  price  level  will  be 
undisturbed.  Likewise  it  will  be  undisturbed  if  the  quan- 
tity of  money  is  doubled  and  the  quantity  of  goods  is 
^doubled,  while  the  velocity  of  circulation  remams  the  same. 
To  doubk  ike  quatimy  of  money,  therefore,  does  not  always 
double  prices.  We  must  distinctly  recognize  that  the 
quantity  of  money  is  only  one  of  three  factors,  aU  equally 
important  in  determining  the  price  level. 

§  4-        Bqnatioa  of  Bnhaiigt  MeelianicaOy  ffiimmd 

The  equation  of  exchange  has  now  been  expressed  by  an 
arithmetical  illustration.  It  may  be  represented  visually  by 
a  mechanical  illustration.  This  is  embodied  in  Figure  10 
which  represents  a  mechanical  balance  in  equilibrium,  the 
two  sides  of  which  symbolize  req)ectivd[y  the  OKmey  side 
and  the  goods  side  of  the  equation  of  exchange.  The 
weight  at  the  left,  symbolized  by  a  purse,  represents  the 
money  in  circulation ;  the  leverage  or  distance  from  the 
fulcrum  at  which  the  purse  b  hung  rqyresmts  the  effidency 
of  thk  maaey,  or  its  velocity  of  diaidation.  The  pioduct 


Sm.41  FUSCHASINO  power  or  l«>MBY  X57 


FM.  xa 


of  the  weight  by  its  leverage  is  exactly  balanced  by  or 
equal  to  amresponding  products  on  the  opposite  side.  Ca 
the  right  side  are  three  weights,  representing  bread,  coal, 
and  cloth,  and  symbolized  respectively  by  a  loaf,  a  coal 
scuttle,  and  a  roll  of  cloth.  The  leverage,  or  distance  of 
each  from  tte  fulcrum,  rei»esents  its  price.  In  ordor  that 
the  leverages  at  the  right  may  not  be  inordinately  long,  we 
have  found  it  convenient  to  reduce  the  unit  of  measure  of 
coal  from  tons  to  himdredweights,  and  that  of  cloth  from 
yards  to  feet,  and  consequoitly  to  oilarge  corrayonding^y 
the  number  of  imits  (the  measure  of  coal  changing  from 
10,000,000  tons  to  200,000,000  hundredweights,  and  that 
of  the  cloth  from  30,000,000  yards  to  90,000,000  feet). 
In  these  new  units  the  price  of  coal  becmnes  35  cents  per 
hundredwdi^t  and  that  of  cloth  becomes  33J  cents  per  foot. 

If  the  purse  at  the  left  becomes  heavier,  it  is  evident 
that,  in  order  to  maintain  the  balance,  some  of  the  weights 
at  tiie  ri^t  must  be  heavier  abo  or  mwt  be  moved 
toward  the  right,  or  else  the  purse  itsdf  must  be  moved 
toward  the  right.  If,  now,  we  assume  that  the  last  and 
first  of  these  three  changes  do  not  occur,  the  middle  one 
must  occur.  In  other  words,  if  the  pontkm  of  the  purse 
remains  unaltered  (»'.«.,  if  the  velocity  of  circulation  of 
money  does  not  change)  and  if  the  weights  at  the  right 
remain  imaltered  {i.e.,  if  the  volume  of  trade  does  not 
change),  then  some  or  all  of  these  weights  must  move  to  the 
r^t  (».e.,  the  prices  of  goods  must  increase).  If  these 
prices  increase  uniformly,  they  will  increase  in  the  same  ratio 
as  the  increase  in  money ;  if  they  do  not  increase  uniformly, 


158   xuamncAiY  vsofcmKS  07  economics  [Cbaf.viii 

some  will  increase  more  and  some  less  than  this  ratio, 
maintaining  an  average.  Likewise  it  is  evident  that  if  the 
vdodty  of  circulation  of  money  increases,  i.e.,  if  the  leverage 
At  the  left  lengthens,  and  if  the  money  in  drculatifm  (the 
purse)  and  the  trade  (the  various  weights  at  the  right) 
remain  the  same,  there  must  be  an  increase  in  prices 
pengthening  of  the  leverages  at  the  right).  Again,  if  there 
is  an  increase  in  the  volume  of  trade  (represented  hy  an 
increase  in  weights  at  the  right),  and  if  the  velocity  of 
circulation  of  money  (left  leverage)  and  the  quantitj'  of 
money  (left  weight)  remab  the  same,  there  must,  be  a 
decrease  in  prices  (right  leverages). 

^  In  general,  any  change  in  one  of  these  four  sets  of  mag- 
nitudes must  be  accompanied  by  such  a  change  or  changes 
in  one  or  more  of  the  other  three  as  shall  maintain 
equilibrtum. 

As  we  are  interested  in  the  average  change  in  prices 
rather  than  in  the  prices  individually,  we  may  simplify  this 
mechanical  representation  by  hanging  all  the  right-hand 
weights  at  one  average  point,  ao  that  the  levenige  shall  rep- 
resent the  average  of  prices.  Thi^  average,  of  10  cents  per 
loaf,  25  cents  per  hundredweight,  and  33I  cents  per  foot,  is 
found  by  dividing  the  total  value  (10  cents  times  200  million 
loaves,  plus  25  cents  times  aoo  nullum  hundiedwei^t, 
plus  33i  cents  times  90  millioa  feet, —or  $xo(m>oo,ooo) 


by  the  total  number  of  units  (200  million  plus  200  millian 
plus  90  milUon  — or  490  mlDioo),  which  is  $100,000,000 


8k.  d  VOMHASDf O  VOWCR  Of  MOMST 


490,000,000,  or  30.4  cents  per  unit.  This  leverage  is  a  so- 
called  "  v/eighted  average  "  of  the  three  original  leverages,  the 
"  weights  "  being  UteraUy  the  we^ts  hanging  at  tHe 

This  averagmg  of  prices  b  represented  in  Figure  zi 
which  visualizes  the  fact  that  the  average  price  of  goods 
(right  leverage)  varies  directly  with  the  quantity  of  money 
(left  weight),  dbectly  with  its  velocity  of  dzculation  (left 
leverage),  and  invendy  with  the  vdume  ti»de  (ii|^ 
weight). 

§5.  The  Bqtntioii  of  Bidumge  Algeteiieally  Ihjpimil 

To  put  these  relations  in  general  terms,  let 

M  stand  for  money  in  circulation, 

F,  its  velocity  of  circulation, 

p,  p\  p",  etc.,  the  prices  of  various  goods, 

Q,  Q',  Q",  €tCt  the  quantities  of  those  goods  sold. 

Then  we  may  write  the  formula  as  follows:—- 

MV^PQ 

+  /Q" 
+  etc. 

MV  evidently  represents  the  amount  of  money  expended 
for  goods  during  the  year.  On  the  other  side  of  the  equa- 
tion, pQ,  p'  Q',  and  so  on,  represent  the  vidues  ci  tiie 
varioxis  goods  bought.  If  in  this  equation  M  is  douoled 
(and  V  and  the  Q's  remain  xmchanged),  then  the  ^'s  will, 
on  the  average,  be  doubled ;  if  K  is  doubled  (and  if  and 
the  Q's  are  undianged),  the  ^'s  wiQ be douMed  fttso;  fri^ 
if  the  Q's  are  doubled  (and  M  and  V  are  nnrhsiigrri),  the 
^'s  will  be  halved. 

The  right  side  of  this  equation  is  the  sum  of  terms  of 
ib»  fona  pQ  —  s  prke  mul^plied  by  a  quantity  bought, 
it  hi  mstomaiy  in  malhematics  to  iM»«viate  »  sum  of 


i6o   BumMTAsy  ntDiarus  or  ^wflnici  iQut^vm 


terms  (all  of  which  are  of  the  same  form)  by  wrftig  "  2  " 
M  a  prefix  to  pQ.  The  Greek  letter  s^ma  b  the  equival- 
ent of  the  !2n|^iah  letter  "  S,"  the  initial  letter  of  sum  md 
is  employed  as  a  symbol  of  summation.  This  symbol  does 
not  signify  a  magnitude  as  do  the  symbols  M,  V,  p,  Q,  etc. 
It  signifies  merely  the  operaHon  of  addition,  and  should  be 
read  "  the  sum  of  terms  of  the  following  type."  The  equa* 
tioD  of  exchange  may  therefore  be  written :  — 

MV"  tpQ. 

We  may,  if  we  wish,  further  simplify  the  right  dde  by 
writing  it  in  the  form  PT  where  P  is  a  weighted  average  of 
all  the  p's,  and  T  is  the  sum  of  all  the  Q's.  P  then  repre- 
sents in  o»*'  magnitude  the  level  of  prices,  and  T  represents 
m  one  m^^-jtude  the  volume  of  trade  of  the  community 
within  or  without  its  borders.  The  equation  thus  simpli- 
fied (ifF  =  PT)  is  the  algebraic  interpretation  of  the 
medianical  illustration  given  in  Figure  zx,  where  all  the 
goods,  instead  of  being  hung  sqMratdy,  as  in  Figure  xo, 
were  combined  and  himg  at  an  avrrage  point  xqaese&tbg 
their  average  price. 

|«.  The  "Qnai^  T*-.  Mooey" 

To  recapitulate,  we  find  then  that,  under  the  conditions 
assumed,  the  price  levd  varies :  (i)  durectly  as  the  quantity 
of  money  m  circulation  (Jf),  (2)  directly  as  the  velocity  of 
its  circulation  {V),  (3)  inversely  as  the  volume  of  trade  done 
by  it  (r).  The  first  of  these  three  relations  needs  special 
emphaas.   It  omstitutes  the  "quantity  theory  of  money." 

So  important  is  this  principle,  and  so  bitterly  contested 
has  it  been,  that  we  shall  illustrate  it  further.  By  "  the 
quantity  of  money  "  is  meant  the  number  of  dollars  (or 
oth«r  i^ven  mmietary  units)  m  drcuhtion.  This  number 
may  be  changed  hi  several  ways,  of  which  the  four  named 
below  are  most  important  A  statement  d  these  four 


Sac.  6] 


PUKCHASINO  POWSA  OV  MONEY 


i6i 


will  serve  to  pictxire  to  our  mind  the  meaning  of  the  con- 
clusions we  have  reached  and  to  reveal  the  fundamental 
peculiarity  of  money  on  which  they  rest. 

I.  As  a  first  illustration,  let  us  suppose  the  govenunent 
to  double  the  denominations  of  all  money ;  that  is,  let  us 
suppose  that  what  has  been  hitherto  a  half  dollar  is  hence- 
forth called  a  dollar,  and  that  what  has  been  hitherto  a 
dollar  is  hencdorth  called  two  ddlars.  Evidently  the  num- 
ber of  "  dollars  "  in  circulation  will  then  be  doubled ;  and 
the  price  level,  measured  in  terms  of  the  new  "  dollars," 
will  be  double  what  it  would  otherwise  be.  Every  one  will 
pay  out  the  MiMCtftM  as  if  no  audi  law  ime  passed.  Buthe 
will,  in  each  case,  be  paying  twice  as  many  "  dollars.*'  For 
example,  if  $3  formerly  had  to  be  paid  for  a  pair  of  shoes, 
*he  price  of  this  same  pair  of  shoes  will  now  become  $6. 
Jhe  inocrf  that  prices  taxut  in  geaaral  be  dooUed  rate  <m 
the  equation  of  exchange.  Money  in  circulation  (M) 
having  doubled  (its  velocity  of  circulation  (V)  and  the 
volume  of  trade  (J)  remaining  the  same),  the  average 
<rf  the  ptkm  (P)  mntt  be  dooMed.  Tl»  same  reasoning 
applies  to  the  three  illustrations  which  follow. 

n.  For  a  second  illustration  suppose  the  government 
cuts  each  dollar  in  two,  coining  the  halves  into  new  "  dol- 
lars " ;  ani,  recalling  all  pq>er  notes,  rqilaoes  them  with 
double  the  original  number  —  two  new  notes  for  each  old 
one  of  the  same  denomination.  In  short,  suppose  money 
not  only  to  be  renamed,  as  in  the  first  illustration,  but  also 
reusued.  Prices  hi  the  ckinned  coinage  will  agiln  be  doolded 
just  as  in  the  first  illustration.  The  subdivision  and  re- 
coinage  is  an  immaterial  circumstance,  imless  it  be  carried 
so  far  as  to  make  counting  difficult,  and  thus  to  interfere 
with  the  eemiemieiiee  of  moroy.  Whcveveraddlarhadbeen 
paid  before  deb  -ement,  two  dollars  —  ».«.,  two  of  the  old 
halves  coined  mto  two  oi  the  new  dollars  —  will  now  be 
paid  instead. 

In  the  first  iHwtratioo,  the  hicreaae  in  Quantity  waa 
u 


tte    BLnmnAiy  fumann  or  looMoinci  |Qu».to 


iimply  nominal,  being  brought  about  by  renaming  coiot. 
In  tue  second  Qlustratioii,  beiidei  icatining,  the  further 

fact  of  recoining  is  introduced.  In  the  first  case,  the  num- 
ber of  actual  pieces  of  money  of  each  kind  was  unchanged, 
but  their  denominations  were  doubled.  In  the  second  case, 
the  number  of  pieces  is  also  doubled  by  spUtting  each  coin 
and  reminting  it  into  two  coins,  each  of  the  same  nominal 
denomination  as  the  original  whole  of  which  it  is  the  half, 
and  by  similarly  doubling  the  paper  money. 

III.  For  a  third  illustration,  suppose  that,  instead  of 
doubling  the  number  of  dollars  by  splitting  them  in  two  and 
recoining  the  halves,  the  government  duplicates  each  piece 
of  money  in  existence  and  presents  the  duplicate  to  the  pos- 
sessor of  the  oiiginaL  (We  must  in  this  case  suppose, 
further,  that  there  is  some  effectual  bar  to  prevent  the 
melting  or  exporting  of  money.   Otherwise  the  quantity  of 
money  in  circulation  will  not  be  doubled ;  much  of  the  in- 
crease win  escape.)  If  the  quantity  of  money  is  thus 
doubled,  prices  will  also  be  doubled  just  as  truly  as  in  the 
second  illustration,  in  which  there  were  exactly  the  same 
number  of  coins  as  now  under  consideration  as  well  as  the 
suae  denominations.  The  only  difference  between  the 
second  and  the  third  illustrations  will  be  in  the  size  and 
weight  of  the  corns.   The  weights  of  the  individual  coins, 
instead  of  being  reduced,  will  remain  unchanged ;  but  their 
number  win  be  doubled.  This  doubling  of  coins  must  have 
the  same  effect  as  the  fifty  per  cent  debesement;  that  is, 
it  must  have  the  effect  of  doubling  prices, 

IV.  The  force  of  the  third  illustration  becomes  even  more 
evident  if,  in  accordance  with  the  presentation  of  the  great 
economist  Ricardo,  we  pass  back  by  means  of  a  seigniorage 
from  the  third  illustration  to  the  second.  That  is,  after 
duplicating  aU  money,  let  the  government  subtract  half  of 
cadi  coin,  ther^y  reducing  the  weight  to  that  of  the  debased 
coinage  in  the  second  illustration,  and  removing  the  only 
point  of  distinction  between  the  two.  Has  "  sejgirfQcafi " 


1^ 


or  charge  for  coinage  made  by  the  sovereign  will  not  affect 
the  money  value  of  the  coins,  so  long  as  their  tmfnber  remains 
miduuiged.  Pnoes  wfll  ranain  at  cndisf  Uif  jttovulM 
before  the  abstraction  of  seigniorage. 

Thus  to  double  the  quantity  of  money  will  double  prices 
in  whatever  way  the  doubling  may  be  brought  about,  — 
unless  there  should  occur  at  the  same  time  some  change 
in  the  vdodty  of  circulation  of  moa^  or  in  Um  voIom 
of  trade. 

The  student  may  ask  whether  some  dbaage  in  the 
vdodty  of  drctthtion  of  money  in  the  volume  iA  tnde 
will  not  necessarily  occur  as  a  direct  consequence  of  the 
increased  quantity  of  money.  The  answer  to  this 
question  is  in  the  negative,  but  this  answer  will  be  better 
mdevrtood  after  we  Iwve  seen  on  idiat  orasci  vdodQr  of 
circulation  and  volume  of  trade  depend.  In  the  present 
chapter  we  are  concerned  merely  to  show  that  an  increase 
in  money  will  necessitate  a  rise  in  prices  promded  the 
vdodty  tA  circulation  and  volume  of  trade  do  ronain  the 
same. 

There  are  many  historical  instances  of  raising  the  prices 
by  inflating  the  currency.  At  present,  Argentina  has  an 
inflated  paper  currency,  and  pr«s  m  papar  pesos  are  a 
little  more  than  double  the  prices  in  the  o  .  iginal    'd  pesos. 

The  quantity  theory,  then,  asserts  that  (p  idea  ve- 
locity of  circulation  and  volume  of  trade  are  uj»:hanged) 
tf  we  increase  the  mmAer  of  ddlais,  whellMHr  \m  —wing 
coins,  by  cutting  them  in  two,  by  duplicating  -n  or  by 
any  other  means,  prices  will  be  increased  in  tl  c  jwo- 
portion.  It  is  Uie  niunber,  and  not  the  wd^  is 
essential.  This  fact  meds  great  emphasis.  It  ^  ft  firt 
iridch  differentiates  money  from  all  other  goo^  ^^^d  ex- 
plains the  pecxiliar  manner  in  which  its  purchase  x)wer 
is  related  to  other  goods.  The  desirability  of  sugar  ck  "^ids 
mon  its  swe^ening  power,  w^  b  a  spec^  ^ss^  %i 
tibs  seme  that  a  given  wc(j^  of  K«ir,  nch  m  m  pii# 


i6«   nnmiTAiv  nncDUt  or  lamomci  Km».ym 


always  poaaecMi  the  tame  sweetening  power.  The  desir- 
ability of  nooey,  on  the  other  hand,  depends  merely  on  Its 
purchasing  power;  but  purduudng  power  b  not  a  qpecific 

quality  of  gold  or  of  other  money,  for  we  cannot  say  that  a 
given  quantity  of  gold,  such  as  an  ounce,  always  possesses 
the  nme  pufchaifaig  power.  If  the  quantity  of  sugar  is 
changed  from  1,000,000  pounds  to  1,000,000  hundredweight, 
it  docs  not  follow  that  a  himdredweight  will  ^ave  the  value 
previously  pcjsessed  by  a  pound,  for  the  sweetening  power 
of  a  hundredweight  cannot  be  the  same  as  that  of  a  pomid. 
But  if  the  money  m  circulation  h  changed  from  1,000,000 
units  of  one  weight  to  1,000,000  units  of  a  lightei  v^^eight, 
the  value  of  the  new  and  lighter  coins  will  be  just  as  great 
as  was  the  vahie  of  the  old  and  heavy  ones,  for  we  have 
seen  from  the  equation  of  «»»i«4**»ff  that  thdr  puichasing 
power  will  be  unchanged. 

The  quantity  theory  of  money  thus  rests,  ultimately, 
vpon  the  fundunental  peculiarity  whidi  money  aloat  of  all 
goods  possesses  —  the  fact  that  it  has  no  definite  relation 
to  the  satisfaction  of  human  wants,  but  only  the  paw§r  k 
pttrchase  things  which  do  have  such  satisfying  power. 


"HAPTER  IX 


1KWi.\>'  ^'J3t  CIt  imOIlT  COWMMJKCf 

(  z.  TlM  MjilMy  U  Cfaoilatiag  CraaU 

Wb  are  now  ready  to  explain  the  nature  of  bank-<lq>odlt 

currency,  or  circulating  credit  Credit,  in  the  sense  here 
employed,  k  the  promise  of  one  party  (called  the  debtor) 
to  pay  money  to  another  party  (called  the  creditor). 
Baidc  deposits  subject  to  diedk  are  tiw  daims  against  the 
bank  of  a  special  class  of  creditors  known  as  depositors, 
by  virtue  of  which  they  may,  on  demand,  draw  by  check 
nedfiied  sums  of  money  from  the  bank.  Since  no  other 
nd  of  bank  dqposits  will  be  conddoed  by  us,  we  shall 
Usually  refer  to  "  bank  deporits  subject  to  check  "  simply 
as  "  bank  deposits."  Th^  are  also  called  "dxculating 
credtf 

It  is  to  be  observed  that  bank  diedks  are  ixusdy 
presumptive  evidences  of  rights  to  draw  mon^  on  the 
basis  of  bank  deposits  or  to  transfer  such  rights.  The 
checks  themselves  are  not  the  ultimate  currency.  It  is 
the  bank  deposits  themselves,  or  credit  balances  on  the 
books  of  the  banks,  that  constitute  the  ultimate  currency. 
As  has  been  noted,  these  deposits  subject  to  check  are  not 
money,  since  they  are  not  generally  acceptable ;  they  always 
require  the  spedal  oooseat  of  the  payee.  But  they  are  cur- 
rency, because  thd«  chid  pmpose  and  use  is  to  act  as  a 
mediimi  of  eirhangp,   Qosdy  analogous  to  checks  are  post 

165 


x66     xlhibnxaxy  nzmsptBs  or  zcosroKics  fCkAr.nc 

office  orders  and  money  orders  issued  by  express  companies. 
They  are  distinguishable  only  by  two  facts:  that  they  are 
not  issued  by  ordinary  banks,  and  that  they  originate  in 
speciai  deposits  of  money  (or  checks).  For  this  reason,  and 
because  they  are  not  of  great  importance,  we  prefer  to 
place  them  in  the  same  category  with  bank  checks  rather 
than  to  place  them  in  a  separate  daas,  which  otherwise 
they  might  occupy. 

It  is  in  connection  with  the  transfer  of  bank  deposits 
that  there  arises  that  so-called  "mystery  of  banking" 
called  circulating  credit.  Many  persons,  including  some 
economists,  have  supposed  that  credit  is  a  special  form  of 
wealth  which  may  be  created  out  of  whole  doth,  as  it  were, 
by  a  bank.  Others  have  maintained  that  credit  has  no 
foundation  in  actual  wealth  at  aU,  but  is  a  kind  of  unreal 
and  inflated  bubble  with  a  precarious  if  not  wholly  illegiti- 
mate  existence.  As  a  matter  of  fact,  bank  deposits  are  as 
easy  to  understand  as  bank  notes,  and  what  is  said  la  this 
chapter  of  bank  deposits  may  in  substance  be  .  v-rn  as  tme 
also  of  bank  notes.  The  chief  difference  is  a  formal  one, 
the  notes  circulating  freely  from  hand  to  hand,  while  the 
deposit  currency  circulates  only  by  means  of  specially  in- 
dorsed orders  called  "  checks." 

To  understand  the  real  nature  of  bank  deposits,  let  us 
Imagine  a  hypothetical  institution  — a  kind  of  primitive 
bank  existing  mainly  for  the  sake  of  deposits  and  the  safe- 
keeping  of  actual  money.  The  original  bank  of  Amster- 
dam was  somewhat  like  the  bank  we  are  now  imagining. 
In  such  a  bank  a  number  of  people  deposit  $100,000  in  gold, 
each  accepting  a  receipt  for  the  amount  of  his  deposit.  If 
this  bank  should  issue  a  "  capital  account "  or  statement, 
it  would  show  |ioo,ooo  in  its  vaults  and  Izoo^ooo  01^  to 
depositors,  as  follows :  — 


Gold 


T.t*iniTn» 
lioo^    Duedepoi&an    .  .  tiee^ 


Sbc.  i] 


XNFLUKNCK  OF  DKP08XT  CDSSXMCy 


167 


The  right-hand  side  of  the  statement  is,  of  course,  made 
up  of  smaller  amounts  owed  to  individual  depositors. 
Assumii^  that  that  is  owed  to  A  $10,000,  to  B  $10,000, 
and  10  all  others  $80,000,  we  may  write  the  bank  statement 
as  follows:  — 

Assns  LiABums 

Gold  $100,000    Due  dqxMiUv  A   .  .  $  10,000 

Due  dqxNitar  B  .  .  zo,ooo 

  Due  other  depodtocB  .  80,000 

$100,000  $100,000 

Now  assume  that  A  wishes  to  pay  B  $ioco.  A  could  go 
to  the  bank  with  B,  present  certificates  or  checks  for  $1000, 
obtain  the  gold,  and  hand  it  over  to  B,  who  might  then 
redeposit  it  in  the  same  bank,  mexfiy  handing  it  back 
through  the  cashier's  window  and  taking  a  new  certificate 
in  his  own  name.  Instead,  however,  of  both  A  and  B 
visiting  the  bank  and  handling  the  money,  A  might  simply 
give  B  a  check  for  $xooo.  B  would  thai  send  the  dieck 
to  the  bank  and  the  bank  would  simply  reduce  A's  credit 
on  its  books  by  $1900  and  increase  B's  by  the  same 
amoimt.  The  transfer  in  either  case  would  mean  that 
A's  holding  in  the  bank  was  reduced  tcm  $xo,oooto  $9000, 
and  that  B's  was  increased  from  $xo,ooo  to  txz,ooo.  The 
stateuMnt  would  then  read:  — 

ASOEli  LlABIUTIES 

Gold  $10^000     Due  depositor  A  .   .   $  9,000 

Due  depomtor  B  .  .  11,000 

IMe  OtoR  QCfKMuOn .  BOiQOO 

$zoo^  $zo^oeo 

Thus  the  oerti&ates,  or  diecks,  would  circulate  in  place 
of  money  among  the  various  depositors  in  the  bank.  What 
reaily  changes  ownership,  or  '^circulates"  in  such  cases  is  the 
r^Al  to  draw  money.  The  check  is  merely  a  presun^>tive 
evkleooeof  ^ii  li^^  ttid  of  Kbit  tnnfer  of  this  tl0it  iran 


l68       XLXIOENTARY  niNCmXS  or  XOONOKICS    (Cbap.  oc 


one  person  to  another.  The  man  who  receives  the  check 
uses  it  as  evidence  of  a  right  to  draw  at  the  bank  against 
the  account  of  the  man  who  drew  the  died:. 

In  the  case  under  consideration,  the  bank  would  be  con^ 
ducted  at  a  loss.  It  would  be  giving  the  time  and  labor 
of  its  clerical  force  for  the  accommodation  of  its  depositors, 
without  getting  anything  in  return.  But  such  a  hypo- 
thetical bank  would  soon  find  —  much  as  did  the  bank  of 
Amsterdam  —  that  it  could  make  profits  by  lending  at 
interest  some  of  the  gold  on  deposit.  This  could  not  offend 
the  depositors;  for  they  do  not  expect  or  desire  to  get 
back  the  identical  gold  they  deposited.  What  they  want 
is  simply  to  be  able  at  any  time  to  obtain  the  same  amount 
of  gold.  Since,  then,  their  arrangement  with  the  bank  calls 
for  the  payment  not  of  any  particular  gold,  but  merely  of 
a  definite  amount,  and  that  but  occasionally,  the  bank 
finds  itself  free  to  lend  out  part  of  the  gold  that  otherwise 
would  lie  idle  in  its  vaults.  To  keep  it  idle  would  be  a 
great  and  needless  waste  <rf  ORxwlunity. 

Let  us  suppose,  then,  that  the  bank  decides  to  loan  out 
half  the  money  which  it  has  in  its  vaults.  In  this  country 
this  is  usually  done  in  exchange  for  promissory  notes  of 
uie  borrowers.  New  a  loan  is  rtaUy  an  exchange  of  money 
(or  credit  — which  is  hnmediately  convertible  into  money) 
for  a  promissory  note  which  the  lender  —  m  this  case  the 
bank  —  receives  in  place  of  the  gold.  Let  us  suppose  that 
so-called  borrowers  actually  draw  out  $50,000  of  gold. 
The  bank  thereby  exchanges  this  money  for  promises,  and 
its  books  will  then  read :  — 

^"■■^  LiABarrtES 

2^.  *  50,000  Due  depositor  A   .   .  $  9,000 

nooumyiK^  .  .     50,000  Due  <^o(utor  B  .  .  11,000 
  DaeodHrdepotiion .  80.000 

$100,000  $100^ 

It  will  be  noted  that  now  the  goid  in  bank  is  only  $50,000, 


Uc  I]  JHWWEHCE  09  DBFOSIT  CUUniCir  169 


wbSit  the  total  deposits  are  still  $100,000.  In  other  words, 
the  depositors  now  have  mcve    money  on  dq)orit  '*  than 

the  bank  has  in  its  vaults!  But,  as  will  be  shown,  this 
form  of  expression  involves  a  popular  fallacy,  in  the  word 
''money."  Something  of  equivalent  value  is  behind  each 
loan,  but  not  necessarily  mone^. 

Next,  suppose  the  borrowers  become,  in  a  sense,  lenders 
also,  by  redepositing  the  $50,000  of  money  which  they  bor- 
rowed, in  return  for  the  right  to  draw  out  the  same  sum  on 
demand,  pr^erring  to  use  the  same  in  making  payments 
by  check  rather  than  by  money.  In  other  words,  suppose 
that  after  borrowing  $50,000  from  the  bank,  they  lend  it 
back  to  the  bank.  The  bank's  assets  will  thus  be  en- 
larged by  $50,000,  and  its  obligatiom  (at  oedit  extended) 
will  be  equally  enhxged;  and  the  baknoe  ihert  ivffl 
beoonies-^ 

ASSBTS  f«IABIU'HM 

Gold  $100,000    Due  depositor  A  .  .  $  9,000 

Praniaaoiy  notes  .  .      50,000    Duedqx»itorB   .  .  tx,ooo 

Doe  oUmr  dspoAttm  .  So^eoe 
Due  new  depositors, 

______       ix.,  the  borrowen  .  50,000 

$190,000  $190^000 

What  happened  in  this  case  was  the  following:  Gold 
was  borrowed  in  exchange  for  a  promissory  note  and  then 
handed  back  in  exchange  tot  a  ii|^t  to  draw.  Thus  the 
gold  really  did  not  budge ;  but  the  bank  received  a  promis- 
sory note  and  the  depositor,  a  right  to  draw.  Evidently, 
therefore,  the  same  residt  would  have  followed  if  each  bor- 
rower had  merely  handed  in  his  promisbory  note  and  re- 
ceived, in  exchange,  a  right  to  draw.  As  this  operation 
most  frequently  puzzles  the  beginner  in  the  study  of  bank- 
ing, we  repeat  the  tables  representing  the  conditions  before 
and  after  these  "  loans,"  i^.,  these  eadiasges  of  promiaaory 
Botet  for  pceaem  ri^ilt  to  draw. 


X70       BLmiNXASY  PIIMCDUS  OT  lOOIIOIIlCS  |Gm».IZ 

BEFORE  THE  LOANS 
Assets  LiABZums 
Gold  $100,000    Doedqwdton.   .  .  fzoo^ 

AFTER  THE  LOANS 

G<Jd  $100,000    Due  depositors .    .  .  $150,000 

FMmiiMMy  notes  .  .  S^fioo 

Clearly,  therefore,  the  intermediation  of  the  money  in 
this  case  is  a  needless  comidication,  thovi^  it  may  help  to 
a  theoretical  imderstanding  of  the  resultant  shifting  of 
rights  and  liabilities.  Thus  the  bank  may  receive  deposits  of 
gold  or  deposits  of  promises  to  pay.  In  exchange  for  these 
IMPomises  it  may  give,  m  lend,  dther  a  ri^^t  to  draw,  or 
gold  —  the  same  that  was  deposited  by  another  custmm. 
Even  when  the  borrower  has  "  deposited  "  only  a  promise 
to  pay  money,  by  fiction  he  is  still  held  to  have  deposited 
money;  and,  like  the  original  dq)ositor  of  actual  money, 
he  is  given  the  right  to  make  out  checks  to  draw  out  money. 
The  total  value  of  rights  to  draw,  in  whichever  way  arising, 
is  termed  "deposits."  Banks  piore  often  lend  rights  to  draw 
(or  depont-r^hts)  than  actual  money,  partly  because  of  the 
greater  convenience  to  borrowers,  and  partly  because  the 
banks  wish  to  keep  their  actual  money  on  hand,  or  "  cash 
reserves"  large,  in  order  to  meet  large  and  unei^ted 
demands.  It  is  true  that  if  a  iMuik  loans  mmey,  port  of 
the  money  so  loaned  will  be  redeposited  by  the  persons 
to  whom  the  borrowers  pay  it  in  the  course  of  business; 
but  it  will  not  necessarily  be  redeposited  in  the  same  bank. 
Hence  the  average  banker  prefers  that  the  borrower  should 
not  withdraw  actual  money. 

Besides  lending  deposit  rights,  banks  may  also  lend  their 
own  notes,  called  "  bank  notes."  And  the  principle  govern- 
ing tenk  notes  is  the  sune  as  the  principle  governing 
deposit  rights.  The  holder  simply  gets  a  po(±etful  of  bank 
notes  instead  of  a  credit  <m  faia  bank  account.  The  hnik 


Sacti       ngmiwcE  or  udobt  cubiihci  171 

m\ist  always  be  ready  to  pay,  on  demand,  either  tiw  note 
holden to  '*  redeem  its  notes —  or  the  depositors, 

and  in  either  case  the  bank  exchanges  a  promise  for  a 
promise.  In  the  case  of  the  note,  the  bank  has  exchanged 
its  bank  note  for  a  customer's  promissory  note.  The  bank 
note  carries  no  interest,  but  is  payable  on  demand.  The 
customer's  note  bears  interest,  but  is  payable  onfy  at  a 
definite  dat 

Assuming  that  the  bank  issues  $50,000  of  bank  notes,  the 
balance  sh^  will  now  become :  — 

Assets  Liabilities 

Gold   $100,000  Dtwdqwaiton     .  .  $iS^0OO 

Loans  (pnaniaaory 

notes)   100.000  Due  bank  note  holders  S0.00Q 


la.  Tbe  Buie  of  Glicalalfais  Credit 

We  repeat  that  by  means  of  credit  the  deposits  and  no^ 
of  a  bcnk  may  exceed  Us  cash.  There  would  be  nothing 
mysterious  or  obscure  about  this  fact,  if  people  could  be 
induced  not  to  think  oi  iMnkuig  operadoos  as  money 
operations.  To  so  represent  them  is  metaphorical  and 
misleading.  They  are  no  more  money  operations  than 
whey  are  real  estate  transactions.  A  bank  depositor.  A, 
has  not  ordinarily  "  deposited  money  " ;  and  whether  he 
has  or  not,  he  certainly  cannot  properly  say  that  he  "  has 
money  in  the  b"  \k.'  "What  he  does  have  is  the  bank's 
promise  to  pay  ley  on  deuiand.  The  bank  owes  him 
money.  Whoi  a  ^ttV9.1jt  ooson  owes  money,  the  credit(» 
never  thmks  of  saybg  that  he  has  it  on  deposit  in  tlw 
debtor's  porket. 

The  same  principles  of  property  which  apply  to  bank 
deposits  also  apply  to  bank  notes.  Thae  is  w«dth  some* 
whetc  behind  the  mutual  promises,  though  in  different 
degrees  of  accessibOity.  The  note  holder't  pnaam  (his 


173       SLEMBNTASY  nmCUOMa  OF  ECONOIIlCi  (Chaf.IX 

promissory  note)  is  secured  by  his  assets;  and  the  bank's 
gramise  (the  bank  note)  is  secuied  by  the  bank's  assets 
The  note  holder  has  "  swapped "  less-known  credit  for 
better-known  credit. 

K  this  fact  is  borne  in  mind,  the  reader  wiU  be  aWe  to 
conquer  the  doubt  which  may  already  have  arisen  in  his 
mmd~the  doubt  as  to  the  legitimacy  of  the  bank's  pro- 
cedure in  "lending  some  of  its  depositors'  money."  It 
cannot  be  too  strongly  emphasized  that,  in  any  balance 
^eet  the  value  of  the  liabilities  rests  on  that  of  the  assets. 
The  deposits  of  a  bank  are  no  exception.   We  must  not  be 
misled  by  the  fact  that  the  cash  assets  may  be  less  than 
the  deposits    When  the  uniniUated  first  learn  that  the 
number  of  doUars  which  note  holders  and  depositors  have 
the  right  to  draw  out  of  a  bank  exceeds  the  number  of 
doUars  in  the  bank,  they  are  apt  to  jump  to  the  conclusion 
that  there  is  nothing  behind  the  notes  or  deposit  liabilities. 
Yet  behind  aU  these  obUgations  there  is  always,  in  the  cas^ 
of  a  solvent  bank,  full  value;  if  not  actual  doUars,  at  any 
r^te,  doUars'  worth  of  property.   By  no  jugglery  can  the 
liabilities  exceed  the  assets  except  in  insolvency,  and  even 
m  that  case  only  nominaUy,  for  it  still  holds  that  the  true 
value  of  the  liabilities  will  be  only  what  can  be  paid  on 
them— perhaps  only  25  cents  on  the  dollar.    This  true 
value  of  the  liabilities  will  rest  upon  and  be  equal  to  the 
true  value  of  the  assets  behind  them  by  means  of  which 
they  will  be  paid,  so  far  as  may  be.    Debts  which  cannot 
or  will  not  be  paid  in  full  are  often  called  "  bad  debts  " ; 
and  the  value  of  "  bad  debts  "  is  not  their  face  value,  but 
their  actual  value  to  the  creditor. 

These  assets,  as  already  indicated,  are,  and  ought  to  be, 
largely  the  notes  of  merchants,  although,  so  far  as  the  prin- 
ciples here  discussed  are  concerned,  they  might  be  any 
property  whatever.  If  they  consisted  in  the  ownership 
of  real  estate  or  other  wealtii  unencumbered  so  that  the 
taagfliie  wealth  which  property  always  represents  were 


8k.  >) 


iwfLumcB  or  sErotcr  cuimicy 


dearly  evident,  all  mystery  would  disappear.  But  the 
effect  would  not  be  <jttfferent.  Instead  iA  taking  grain, 
madiines,  or  steel  ingots  on  deposit,  in  exchange  for  the 
sums  lent,  banks  prefer  to  take  interest-bearing  notes  of 
corporations  and  individtuds  who  own,  directly  or  indirectly, 
grain,  machines,  and  sted  ingots ;  and  by  the  banking  laws 
the  banks  are  even  compelled  to  take  the  notes  instead  of 
the  ingots.  The  bank  finds  itself  with  liabilities  which 
exceed  its  cash  assets ;  but  this  excess  of  liabilities  is  balanced 
by  the  possession  of  other  anets  than  cash.  These  other 
assets  of  the  bank  are  the  liabilities  of  business  men. 
These  liabilities  are  in  turn  supported  by  the  assets  of  the 
business  men.  If  we  continue  to  follow  up  '^he  chain  of 
liabilities  and  assets,  we  shall  find  the  ultimate  basb  of 
the  bank's  liabilities  in  the  concrete  tangible  wealth  of  he 
world. 

This  ultimate  basis  of  the  entire  credit  structtire  is  kept 
out  of  sight,  but  the  basis  exists.  Indeed,  we  may  say  that 
banking,  in  a  sense,  causes  this  concrete,  tangible  wealth  to 
circulate.  If  the  acres  of  a  landowner  or  the  iron  stoves  of 
a  stove  dealer  cannot  circulate  in  literally  the  same  way 
that  gold  dollars  circulate,  y;t  the  landowner  at  stove 
dealer  may  g^ve  to  the  bank  a  uote  on  which  the  banker 
may  base  bank  notes  or  deposits ;  and  these  bank  notes  and 
deposits  will  circulate  like  gold  dollars.  Through  banking, 
he  who  possesses  wealth  difficult  to  exchange  can  create  a 
drculathig  medium  baaed  upon  that  wealth.  He  has  only  to 
give  his  note,  for  which,  of  course,  his  property  is  liable,  get 
in  return  the  right  to  draw,  and  lol  his  comparatively 
unexchangeable  wealth  becomes  liquid  currency.  To  put  it 
cruddy,  d^Kwit  banking  is  a  device  for  coining  into  dol- 
lars land,  stoves,  and  other  wealth  not  otherwbe  generally 
exchangeable. 

We  b^;an  by  regarding  a  bank  as  substantially  a  coopera- 
tive entecpibe,  q;wrated  for  tht  convenienoe  and  at  the  ex- 
pense of  its  depodton.  But,  as  soon  as  the  bank  icadici 


174       BUMIMIARY  PSHfOPUS  OV  (Qu».IX 


the  point  of  kndiiig  money  to  X,  Y,  and  Z  on  time,  while 
itself  owing  money  on  demand,  it  assumes  toward  X,  Y, 
and  Z  risks  which  the  depositors  would  be  unwilling  to 
•moot.  To  meet  this  situation,  the  responsibility  and 
expense  of  running  the  bank  are  taken  by  a  thiid  daat  <rf 
people  —  stockholders  —  who  are  willing  to  assume  the 
risk  for  the  sake  of  the  chance  of  profit.  Stockholders,  in 
^nder  to  guarantee  the  depositors  against  loss,  put  in  some 
cash  of  their  own.  The  object  it  to  make  good  any  loss 
to  depositors,  while  reservmg  the  right  to  keq>  the  pn^ts 
earned  by  loaning  at  interest.  Let  us  suppose  that  the 
stockholders  put  in  $50,000,  viz.,  $40,000  in  goJd  and  $10,000 
in  the  purchase  of  a  bank  buildiag.  The  accounts  now 
stand: — 

LiABnxnxs 

Due  depositors  .  .  $150,000 
Pue  note  holden  .  .  50,000 
DaeitocUioldaa  .  .  50.000 

The  accounts  as  they  now  stand,  include  the  diief  features 
of  an  ordinary  modem  bank  —  a  so-called  **  h^rik  <d  deposit, 
issue,  and  discount." 

S3.  Banldnc  Uattttions 

We  have  seen  that  there  are  assets  to  meet  the  liabilities. 
We  now  should  note  that  the  form  of  the  assets  must  be 
such  as  will  msure  meeting  the  liabilities  promptly.  Since 
the  business  oi  a  bank  is  to  furnish  easily  exchangeable 
property  (cash  or  credit)  in  place  of  the  "  slower  "  prop- 
erty of  its  depositors,  it  fails  of  its  purpose  when  it  is 
caught  with  insuffictent  cash,  by  which  is  meant  m<»iey. 
Yet  it  makes  profits  partly  by  tying  up  its  quick  pnq)erty, 
».«.,  lendmg  it  out  in  quarters  where  it  is  less  accessible. 
Its  problem  in  policy  is  to  tie  up  enough  to  increase  its 


Assns 

Gold   $140,000 

  100,000 

Building   io/)oo 

$350^00 


sk.31       dvluzncs  or  uposxt  cuiuNcy  175 

— bat  not  to  tie  up  ao  much  m  to  get  tied  up  itadf. 
So  far  as  anything  has  yet  been  said  to  the  contrary,  a 
bank  might  increase  indefinitdy  its  loans  in  relation  to  its 
cash  or  in  relation  to  Hs  capital  If  tUs  were  so,  deposit 
curreocy  could  be  indefinitely  inflated. 

There  are,  however,  limits  to  such  expansion  of  loans 
imposed  by  prudence  and  sound  economic  pdicy.  Insolr 
vency  and  insuffidemy  of  cash  must  both  be  avoi&d.  As 
has  been  noted  in  Chapter  III,  §  5,  insolvency  is  that  condi- 
tion which  threatens  when  liabilities  are  extended  with  in- 
sufficient capital.  Insufficiency  of  cash  is  that  condition 
which  threatens  when  liabilities  are  extended  unduly  ?eiar 
lively  to  cash.  Insolvency  is  reached  when  the  assets 
no  longer  cover  the  liabilities  (to  others  than  stockholders), 
so  that  the  bank  is  unable  to  pay  its  debts.  Insufficiency 
of  cash  is  reached  when,  although  the  bank's  total  aaseU 
may  be  fully  equal  to  its  liaUUties,  the  actual  cash  on 
hand  is  insufficient  to  meet  the  needs  of  the  instant,  and 
the  bank  is  imable  to  pay  its  fithis  on  demand. 

The  risk  of  insolvency  is  the  greater  the  less  the  ratlD 
of  the  stodcholders'  interests  to  all  liahiUties  to  others.  The 
risk  of  insufficiency  of  cash  is  the  greater,  the  less  the  ratio 
of  the  cash  to  the  demand  liabilities.  In  other  words,  the 
leading  saf  ^piard  against  insolvency  lies  in  a  large  ct^iital 
and  surphis,  but  the  leadmg  saf  q^uard  against  imuffidenqr 
of  cash  lies  in  a  large  cash  reserve.  Insolvency  proper 
may  befall  any  business  enterprise.  Insuffidenqr  of  cash 
relates  especially  to  banks  in  their  function  of  redeeming 
notes  ai^  deposits. 

Let  us  illustrate  insufficiency  of  cash.  In  our  bank's 
accounts  as  we  left  them  there  appeared  cash  to  the  extent 
of  $140,000,  and  $200,000  of  demand  liabilities  (deposits  and 
notes).  The  managers  of  the  bank  may  think  tlds  tsaad  of 
$140,000  imnecessarily  large,  or  the  loans  unnecessarily 
small.  They  may  then  increase  their  loans  (extended  to 
customers  partly  in  the  form  of  cash  and  partly  in  the  fotni 


Z76     uiiiiMXAiy  puNcinis  or  ■oopomci  fOMt.  a 

of  dipodt  accounts)  until  the  cash  held  by  tlie  bank  is  i«. 

duced,  say  to  $40,000,  and  the  liabflities  due  depositors  and 
note  holders  increased  to  $:,3o,ooo.  If ,  under  these  drcum- 
stances,  some  depositor  or  note  holde.  demands  $50^ 
ash,  hnmediate  payment  wiU  be  imposriUe.  It  is  true  that 

the  assets  still  equal  the  liabiliUes.  There  is  full  value  be- 
hind the  $50,000  demanded;  but  the  understanding  was 
that  depositors  and  note  holders  should  be  paid  in  money  on 
demand.  Were  this  not  a  st^ulation  of  the  deposit  con- 
tract, the  bank  might  pay  the  claims  thus  made  upon  it  by 
transferring  to  its  creditors  the  promissory  notes  due  it  from 
its  debtors;  or  it  might  ask  the  customers  to  wait  until  it 
could  turn  these  securities  into  cash. 

Since  a  bank  cannot  follow  either  of  these  plans,  it  tries, 
where  msuffidency  of  cash  impends,  to  forestaU  this  condi- 
tion by  "  calMng  hi "  some  of  its  loans,  or  if  none  can  be 
caUed  m,  by  selling  some  of  its  securities  -  other  property 
for  cash.   But  it  happens  unfortunately  that  there  is  a  limit 
to  the  amount  of  cash  which  a  bank  can  suddenly  realize. 
No  bank  could  escape  faUure  if  a  large  percentage  of  its  note 
iMMers  and  depositors  should  HtmakmeouOy  demand  cash 
payment.   The  paradox  of  a  run  on  a  bank  is  well  expressed 
by  the  case  of  the  man  who  inquired  of  his  bank  whether  it 
had  cash  available  for  paying  the  amount  of  his  deposit, 
«ymg.    If  you  can  pay  me,  I  don't  want  it;  but  if  you 
can  t,  I  do."   Such  was  the  situation  in  1007  in  Wall  Street 
All  the  depositors  at  one  time  wanted  to  be  sure  their  noney 
was  there."  Yet  it  never  m  there  all  at  one  tune. 
Since,  then,  iusuffidency  of  ctsh  is  so  troublesome  a  con- 
dition -  so  difficult  to  escape  when  it  has  arrived,  and  so 
difficult  to  forestaU  when  it  begins  to  approach  —  a  bank 
must  so  regulate  its  loans  and  note  issues  as  to  keep  on  hand 
a  suffiaent  cash  renrw,  and  thus  prevent  msuffidency  of 
cash  from  even  threatening.   It  can  regulate  the  reserve  in 
various  ways.   For  instance,  it  can  increase  its  reserve  rda- 
tivdy  to  Its  liabiUties  by  "  discountmg  »  less  fredy  —  by 


sk.  si       uurmmci  or  oBonr  cohbhci  177 

raising  the  rate  of  discount  and  thus  discouraging  would-be 
borrowers,  by  outright  lefuial  to  lend  «r  evni  to  iwtw  old 
kMiis,  or  by  "  calHng  in  "  loans  subject  to  call.  Reversely, 
it  can  decrease  its  reserve  relatively  to  its  liabilities  by  dis- 
counting more  freely  — by  lowering  the  rate  of  discount 
and  thus  attracting  borrowers.  The  tnore  the  kins  In  pfo- 
portion  to  the  cash  on  hand,  the  greater  the  profits,  but  the 
greater  the  danger  also.  In  the  long  run  a  bank  nuuntains 
its  necessary  reserve  by  means  of  adjusting  the  interest  rate 
charged  for  loans.  K  it  has  few  loans,  and  a  reserve  large 
enou^  to  support  loans  of  much  greater  volume,  it  will 
endeavor  to  extend  its  loans  by  lowering  the  rate  of  interest. 
If  its  loans  are  large,  and  it  fears  too  great  demands  on  the 
reserve,  it  will  restrict  the  loans  by  a  high  interest  dwige. 
Thus  by  altematdy  raising  and  lowoing  the  rate  of  interest, 
a  ba  k  keeps  its  loans  within  the  sum  which  the  reserve  can 
support,  but  endeavors  to  keep  them  (for  the  sake  of  profit) 
as  high  as  the  reserve  will  support 

If  the  sums  owed  to  individual  depositors  are  large,  rela- 
tively to  the  total  liabilities,  the  reserve  should  be  propor- 
tionately large,  since  the  action  of  a  small  number  of  deposi- 
tors can  deplete  it  rapidly.  The  reserve  hi  a  large  dty 
great  bankkg  activity  needs  to  be  greater  in  proportion  to 
its  demand  liabilities  than  in  a  small  town  with  infn  it 
banking  transactions.   No  absolute  numerical  rule  c&i  jc 
given.   Arbitrary  rules  are  often  imposed  by  law.  Banks 
hi  the  United  States,  lor  histance,  are  required  to  keep  a 
ratio  of  reserve  to  deposits,  varying  from  twelve  and  a  half 
per  cent  to  twenty-five  per  cent,  according  as  they  are  state 
or  national  banks,  and  according  to  tiMir  location.  For 
the  whole  country  the  reserves  in  banks  are  about  one 
fifth  of  the  deposits.    These  reserves  are  all  in  defense  of 
deposits.   In  defense  of  bank  notes,  which  are  issued  only 
by  national  banks,  the  method  of  protecti<m  is  different. 
Thie,  the  same  eoonomic  priiicq>les  apply  to  both  bank  aotet 
and  dqpoaits,  but  the  law  treats  them  differently.  Thegofv- 
■ 


cnuBoit  ItMlf  dwotet  to  undertake  to  redeem  the  national 
bank  notes  on  demand,  imposing  on  the  banks  certafai  obfi- 
gaUons  to  deposit  with  itself  a  ledemptkNi  fund  and  fovcm- 
ment  bonds. 

Aa  pravknisly  stated  the  cash  reserves  of  banks,  though 
money,  are  not,  properly  speaking,  money  in  dnkhUm. 
The  reason  is  that  they  are  not  held  for  the  purchase  of 
goods,  but  for  the  redemption  of  another  kind  of  cuirency 
—  deposits.  Vhtts  the  money  in  any  society  is  divided 
into  two  chief  parts ;  money  in  drcuktion  ami  money  in 
banks.  In  the  United  States  these  two  are  approximately 
equal,  both  being  about  one  and  a  half  billion  dollars.* 

§4*  The  ItoM  Conaa^  tad  Hi  dnaiirtioa 

The  study  of  banking  operations,  then,  discloses  two 
qMdeaof  bukoirrency:  one,  baidc  notes,  belonging  to  the 
category  of  money ;  and  the  other,  depodts,  belonging  out- 
side of  that  category  but  constituting  an  excellent  substi- 
tute. Refening  these  to  the  larger  cat^ory  of  goods,  we 
have  a  threefold  classification o( goods:  int,  money;  second, 
deposit  currency,  or  simply  deposits;  and  third,  all  other 
goods.  Among  these,  then,  there  are  six  ponible  types  ol 
exchange: — 

(i)  Money  against  money, 
(a)  Deposits  against  dq)08iti, 

(3)  Goods  against  goods, 
(a)  Money  against  deposits, 

(5)  Money  against  goods, 

(6)  Dqwsits  against  gooda. 

For  our  purpose,  only  the  last  two  types  0!  exchange  are 
important,  for  these  constitute  the  dnnlalion  0/  cnmncy, 

'  In  the  United  States  there  IS  a  third  though  smaller  stock  of  money, 
the  hoard  in  the  United  States  Treasury,  amounting  at  present  to  about 
a  third  of  a  billion  of  dollars.  In  other  cmmtriim  the  ywi—tmrt  wuutf 
b  usually  abuMt  all  depouted  in  banka. 


DVLUIMCl  ov  mtouf  cuuiHcy 


Ai  regards  the  other  four,  the  fint  and  third  have  ban  pf»* 
vioudjr  exptaiiMd  aa  money  changhig"  and  "btrtar," 
respectively.  The  s^tcond  and  fourth  are  banking  trans- 
actions :  the  second  oeing  such  operations  as  the  selling  of 
drafts  for  checks  or  the  mutual  cancellation  of  bank  dear* 
ingi;  and  the  founhbdag  such  operations  as  the dcporitiiif 
or  withdmdag  of  money,  by  dtpoeiting  cash  or  CMhfaig 
checks. 

The  analysis  of  the  balance  sheets  of  banks  has  prepared 
us  for  the  bidtnion  of  bank  depoaita  nr  ciicukting  cndit  k 
the  equation  of  exchange.  We  shau  use  Jf  to  express 
the  quantity  of  actual  money,  ^-  j  express  the  velocity 
of  its  circulation.  Similarly,  we  ol  now  use  if'  to  express 
the  total  depoaita  aubjeet  to  tnxuiec  by  check;  and  F'  to 
express  tlM  average  vdodty  of  their  circulation.  The  total 
v^ue  of  purchases  in  a  year  is  therefore  no  longer  to  be 
measured  by  MV,  but  by  MV  +  M'V'.  The  equation  of 
eichan|e»  therefore,  becomea 


Let  us  again  represent  the  equation  of  exchange  by  means 
of  a  mechanical  picture.  In  Figiure  12,  trade,  as  before,  is 
represented  on  the  right  by  the  weight  of  a  miscdlaneoui 


assortment  of  goods ;  and  their  average  price  by  the  distance 
to  the  right  from  the  fvdcni'.',  ♦he  leverage  at  which 
this  weight  hangs.  Again  .<.t  lu-  ^oney  (if)  is  xepn- 
sented  by  a  wei^t  in  the  f<»/  •  of  a  parse,  and  its  velocity  of 
circulation  (V)  by  its  leveK  .;^*;  b»Jt  a  e  have  a  nw 
weii^t  at  the  left,  in  the  tatir     a  bank  Uxk,  to  npniMl 


MV-{-M'V''lfQ'PT. 


cz 


Jha.  ta. 


l8o       XUMBNTAKY  PUNCIFUS  Of  TCONOIIZCS  (Cbat.DC 

the  bank  deposits  (Af').  The  velocity  of  circulation  (F') 
of  these  bank  deposits  is  represented  by  its  distance  horn. 
the  fulcrum  or  the  leverage  at  which  the  book  hangs. 

This  mechanism  makes  clear  the  fact  that  the  average 
price  (right  leverage)  increases  with  the  increase  of  money  or 
bank  deposits  and  with  the  velocities  of  thdr  drculation, 
and  decreases  with  the  increase  in  the  volume  of  trade. 

Recurring  to  the  left  side  of  the  equation  of  exchange, 
or  If  7  +  M'V,  we  see  that  in  a  community  without  bank 
deposits  the  left  side  of  the  equation  reduces  simply  to 
MV,  the  formula  of  Chapter  VIII ;  for  in  such  a  community 
the  term  M'  V'  vanishes.  The  mtroduction  of  M'  tends  to 
raise  prices;  that  is,  the  hanging  of  the  bank  book  on  the 
left  requires  a  lengthening  of  the  leverage  at  the  ri^t 

§  5-  Deposit  Cunmicy  NonnaUy  Rroportfooal  to  MifBty 

With  the  extension  of  the  equation  of  monetary  circula- 
tion to  include  deposit  circulation,  the  influence  exerted  by 
the  quantity  of  money  on  general  prices  becomes  less  direct ; 
and  the  process  of  tracing  this  influence  becomes  more  diffi- 
cult and  complicated.  It  has  even  been  argued  that  this 
interposition  of  circulating  credit  breaks  whatever  connec- 
tion there  may  be  between  prices  and  the  quantity  of  money. 
This  would  be  true  if  circulating  credit  were  independent  of 
money.  But  the  fact  is  that  the  quantity  of  circulating 
credit,  M',  tends  to  hold  a  definite  relation  to  M,  the  quan- 
tity of  money  it.  circulation ;  that  is,  deposits  are  normally 
a  more  or  less  definite  multiple  of  money. 

Two  facts  normally  give  deposits  a  more  or  less  definite 
ratio  to  money.  The  first  has  been  ahready  explained,  viz., 
that  bank  reserves  are  kept  in  a  more  or  less  definite  ratio 
to  bank  deposits.  The  second  is  that  individuals,  firms, 
and  corporations  presnve  more  or  less  definite  ratios  between 
their  cash  transactions  and  their  check  transactions,  and  also 
between  their  money  and  d^osit  balances.  These  ntiof 


Sk.  sI       dvlubncb  or  deposit  cosBSNcy  i8x 

are  determined  by  motives  of  individual  convenience  and 
habit.  In  genml,  business  firms  use  nKmey  ioc  wage  pay- 
ments, and  for  small  miscellaneous  transactions  included 
imder  the  term  "  petty  cash  " ;  while  for  settlements  with 
each  other  they  usuaUy  prefer  checks.  These  preferences 
are  so  strong  that  we  could  not  imagine  them  ovmiddcn 
except  temporarily,  and  to  a  small  degree.  A  business  firm 
would  hardly  pay  car  fares  with  checks  and  liqudate  its 
large  liabilities  with  cash.  Each  person  strikes  an  equilib- 
rium between  his  use  of  the  two  methods  of  payment,  and 
does  not  greatly  distiu-b  it  except  for  short  periods  of  time. 
He  keeps  his  stock  of  money  or  his  bank  balance  in  constant 
adjustment  to  the  payments  he  makes  in  money  or  by  check. 
WhenevCT  his  stock  of  money  becomes  rdativdy  small  and 
his  bank  balance  relatively  large,  he  cashes  a  check,  la 
the  opposite  event,  he  deposits  cash.  In  this  way  he  is 
constantly  converting  one  of  the  two  media  of  exchange  into 
the  other.  A  private  individual  usually  feeds  his  purse  frmn 
his  bank  account ;  a  retail  commercial  firm  usually  feeds  its 
bank  account  from  its  till  The  bank  acts  as  inteimediaiy 
for  both. 

Another  reason  why  money  and  checks  eadi  have  sqMr 
rate  spheres,  tending  at  any  given  time  to  maintain  a  fairly 
definite  relation  to  each  other,  is  that  they  are  used  in 
definitely  different  ways  by  different  classes.  Thus  wage 
earners  for  the  most  part  use  only  money,  wti^  the  pro- 
fessional and  pr(^)ertied  classes  and  the  fictitioiis  persons 
(corporations,  partnerships,  etc.)  use  mostly  checks.  At 
present  probably  over  half  of  the  families  in  the  United 
States  use  no  checks. 

F(Mr  any  one  individual  the  adjustnwnt  <rf  cash-in- 
pocket  to  deposits-in-bank  will  be  extremely  rough;  for 
sometimes  the  one  or  the  other  will  be  much  too  large  or 
too  small.  But,  for  the  community  as  a  whde,  the  ad- 
lustmoit  of  the  cash  to  dqposits  used  will  be  very  ddi- 
cate;  for  the  tempmury  aherratk^s  at  many  thousamlt 


m-EMENTARY  PSINdPLES  OF  ECONOMICS  [Qur.IX 


of  individuals  wiU  ordinarily  almost  completely  neutralise 

each  other. 

In  a  given  community  the  quantitative  relation  of  deposit 
currency  to  money  b  determined  by  several  considerations 
of  convenience.   In  the  first  place,  the  more  highly  devel- 
oped the  business  of  a  community,  the  more  prevalent  the 
use  of  checks.   Where  business  is  conducted  on  a  large  scale, 
merchants  habitually  transact  their  larger  operations  with 
each  other  by  means  of  checks,  and  their  smaller  ones  by 
means  of  cash.   Again,  the  more  concentrated  the  popula- 
tion, the  more  prevalent  the  u^o  of  checks.   In  cities  it  is 
more  convenioit  both  for  the  payer  and  the  payee  to  mal  j 
large  payments  by  check ;  whereas,  in  the  country,  trips  to 
a  bank  are  too  expensive  in  time  and  eflfort  to  be  conven- 
ient, and  therefore  more  money  is  used  in  proportion  to  the 
amount  of  business  done.   Again,  the  wealthier  the  members 
of  the  community,  the  more  largely  will  they  use  checks. 
Laborers  seldom  use  them ;  but  capitalists,  professional  and 
salaried  men,  use  them  habitually,  for  personal  as  well  as 
buaness  transactions. 

There  is,  then,  a  relation  of  .convenience  and  custom  be- 
tween check  and  cash  circulation,  and  a  more  or  less  stable 
ratio  between  the  deposit  balance  of  the  average  man  or 
oorporatbn  and  the  stock  of  money  kept  in  pocket  or  tiU. 
This  fact,  as  applied  to  the  country  as  a  whole,  means 
that  by  convenience  a  fairly  definite  ratio  is  fixed  be- 
^  '  ^  disturbed  temporarily, 

there  will  come  into  play  a  tendency  to  restore  it.  Indi- 
viduals wiU  deposit  surplus  cash,  or  they  will  cash  surplus 
deposits. 

Hence,  both  money  in  circulation  (as  shown  above)  and 
money  in  reserve  (as  shown  previously)  tend  to  keep  in  a 
fixed  ratio  to  deposits.  It  fdkws  that  the  two  must  be  in  a 
more  or  less  definite,  though  dastic,  ratio  to  each  other. 


Sacdi       mwunanat  or  deposit  cubuncv  183 

§  6.  Suinnuuy 

The  contents  of  this  chtqpt^r  may  be  formulated  in  a  few 
simple  propositions :  — 

(1)  Banks  supply  two  kinds  of  currency,  viz.,  bank  notes 

—  which  are  money ;  and  bank  dqposits  (or  rights  to  draw) 

—  which  are  not  money. 

(2)  A  bank  check  is  merely  presumptive  evidence  of  a 
right  to  draw. 

(3)  Bdxmd  the  claims  of  dqpositors  and  note  holders 
stand,  not  8inq>ly  the  cash  reserve,  but  all  the  assets  of  the 

bank. 

(4)  Deposit  baiddng  is  a  device  by  which  wealth,  inca- 
pable of  direct  circulation,  may  be  made  the  Imuos  of  the 
circulation  of  rights  to  draw. 

(5)  The  basis  of  such  circulating  rights  to  draw  or  de- 
posits must  consbt  in  part  of  actual  money,  and  it  skould 
caasast  in  part  also  of  quidi  assets  readify  eaniiangrabte  for 
money. 

(6)  Six  sorts  of  exchange  exist  among  the  three  classes  of 
goods,  money,  deposits,  and  other  goods.  Of  these  six 
sorts  of  ezdiange,  the  msxt  inqx>rtant  for  otir  present  pur- 
poses are  the  exdianget  of  num^  and  deposits  agaiort  otlier 

goods. 

(7)  The  equation  of  money  circulation,  extended  so  as  to 
maLs  it  indude  bank  deposits,  reads  thus:  MK  +  M'V' 

^lpQ  =  PT. 

(8)  Bank  deposits  {M')  tend  to  keep  a  normal  ratio  to 
bank  reserves  and  to  the  quantity  of  money  (Jf ) ;  because, 
in  the  first  i^ace,  cadi  resnves  are  necessary  to  rapport 
bank  deposits,  and  these  reserves  must  bear  some  more  or 
less  constant  ratio  to  the  amount  of  such  deposits ;  and 
because,  in  the  second  place,  business  convenience  dictates 
that  tte  drcnlatii^  xaedhim  w  currency  sluUl  be  vppas- 
tione-1  between  deposits  and  money  in  a  certain  mofe  or 
less  definite,  cvoi  thmi|^  dastic,  ratio. 


CHAPTER  X 

CAUSW  AND  mCtS  OF  PURCHASING  VOm  ODUNG  nuim. 

TION  PEBIODS 

i  X.  Tnmaitioii  Pwiods 

«f  ^^n^T^l^*  "^P*"'  that  the  quantity 

^T^^  '?"^/  "^'^  ^  °r  less  definite 
Imonn^  ^^r^*'^  of  money  in  circulation  and  to  the 
amoun  of  bank  reserves.   As  long  as  this  normal  rdatfem 

rffect  on  the  kvd  of  prices  produced  by  the  qua^ty  of 
X7  ^,^tio«  and  does  not  in  the  least  distort  tilt 
effect.   Moreover,  changes  in  velocity  or  trade  wiU  have  the 

^Z^tno:!"^'  "  '^^^  bank  deposits  «• 

But  during  periods  of  transition  this  relation  between 

money  (M)  and  deposits  C-^)  is  by  no  r^s  ri^  T 

which  a  disturbance  in  any  of  the  six  magnitudes  in  the 
equation  of  exd.ange(forin8tance,anincreaseTi7q^^^ 
of  money  m  circulation)  works  out  its  effects.   It  take,  tin^ 

just  as  It  takes  time  after  a  locomotive  engineer  has  out 
on  more  steam  for  the  full  effects  to  be  wTby  the  t^ 
m^t  er'^r;  ^-^^-Jways  a  transition  p^  JSS 
and,  during  this  transition  period,  the  effects  are  sonTS 


Sic.  z] 


XKANSinON  JraSIODS 


different  from  the  final  result  after  the  transition  period  fa 

over.  Thus,  though  the  final  result  of  suddenly  putting  on 
the  Increased  steam  will  be  to  increase  the  speed  of  the  train 
from  thirty  miles  per  hour  to  forty  miles  per  hour,  this  effect 
will  not  be  fdt  r  ^mediately.  There  will  be  a  transitioQ 
period  of  several  minutes  before  this  speed  is  attained.  Dur- 
ing this  transition  period  the  speed  will  gradually  increase, 
the  couplings  will  expand  and  then  contract,  the  passengers 
will  fed  jdted,  and  so  forth.  After  the  tnuudtion  period 
is  over,  the  train  will  nm  smoothly  again. 

We  are  now  ready  to  study  periods  of  transition  for  the 
equation  of  exchange.  Our  concern  is  with  rising  or  falling 
prices.  Rising  prices  marie  the  transition  between  a  knra* 
and  a  higher  levd  of  prices,  just  as  a  hill  marks  the  transi- 
tion between  flat  lowlands  and  flat  highlands. 

The  study  of  these  accUvities  and  declivities  is  bound  up 
with  the  stady  of  business  loans.  Now  when  [vices  are 
rising  borrowers  are  benefited  and  lenders  injured,  while 
when  prices  are  falling  the  opposite  is  true.  It  must  be 
borne  in  mind  that  although  business  loans  are  made  in  the 
f<mn  oi  maoey,  yet  whenever  a  man  borrows  money  ht 
does  not  do  this  in  order  to  hoard  the  money,  but  to 
purchase  goods  with  it.  Suppose  A  borrows  $ioo  from  B. 
What  has  really  been  borrowed  is  purchasing  power.  If 
at  the  end  of  a  year  A  returns  $zoo  to  B,  but  prices  have 
meanwhile  advanced,  then  B  has  lost  a  fraction  of  the  pur- 
chasmg  power  originally  loaned  to  A.  Even  though  A 
should  happen  to  retiim  to  B  the  identical  coins  in  which 
the  loan  was  made,  these  coins  represent  aomeidiat  le«  than 
the  original  quantity  purdiasable  commodities.  Bearing 
this  in  mind,  let  us  suppose  that  prices  are  rising.  Then 
every  lender  will  lose  by  the  rise  in  prices  unless  he  can  safe- 
goaid  himsdf  i^ainst  this  loss  by  making  sufficiently  hard 
terms  with  the  borrower.  Usually,  however,  when  prices  are 
about  to  rise,  neither  the  lender  nor  the  borrower  fully  realizes 
that  prices  are  going  to  rise  as  much  as  they  actually  do. 


Z86        ELEXENTAKY  PKINCIPLES  07  ECONOMICS     [Chap.  X 


fa.  How  a  Um  «f  McM  OMMilit  a  Mktr  SiM 

We  are  now  ready  to  study  temporary  or  transitional 
changes  in  the  factors  of  our  equatkm  of  exchange.  Let  us 

begin  by  assuming  a  slight  initial  disturbance,  such  as  would 
be  produced,  for  instance,  by  an  increase  in  the  quantity 
of  gold.  This,  through  the  equation  of  exchange,  will  cause 
a  rise  in  prices.  As  prices  rise,  profits  of  bxisiness  men 
measured  in  money  will  rise  also,  even  if  the  costs  of  business 
were  to  rise  in  the  same  proportion.  Thus,  if  a  man  who 
sold  goods  for  $10,000  which  cost  $6000,  clearing  I4000, 
could  get  double  prices  at  double  cost,  his  profit  would 
double  also,  being  $20,000  — $12,000,  which  is  $8000.  Of 
course,  such  a  rise  of  profits  would  be  purely  nominal,  as  it 
would  merely  keep  pace  with  the  rise  in  price  level.  The 
business  man  would  gain  no  advantage,  for  his  larger  money 
profits  would  buy  no  more  than  his  former  smaller  money 
profits  bought  before.  But,  as  a  matter  of  fact,  the  busi- 
ness man's  profits  will  usually  rise  more  than  this,  because 
many  of  his  expenses  will  tend  to  remain  the  same.  In 
particular  his  payments  to  creditors  for  past  loans  and  his 
payments  to  employees  for  work  will  for  a  time  remain 
una£fected  or  little  affected  by  the  general  rise  in  prices. 
Consequently,  he  will  find  himsdf  making  greater  profits 
than  usual,  and  be  encouraged  to  expand  his  business  by 
increasing  his  0  'owings.  These  borrowings  are  mostly 
in  thf  '  n  of  '.-ii  >  1-time  loans  from  banks ;  and,  as  we  have 
seen  /liuipte"  1  <^  ^  x)»  short-time  loans  engender  deposits. 
Therefore,  de^v^ait  oirrency  (it)  will  increase.  But  this 
extension  of  deposit  currency  tends  further  to  raise  the 
general  Wei  of  prices,  just  as  the  increase  of  gold  raised  it 
in  the  first  place.  This  further  rise  of  prices  enaUes  bor- 
rowers who  are  now  receiving  greater  profits  to  receive 
still  greater  profits.  Borrowing,  already  stimulated,  is  stim- 
ulated still  further.  More  loans  are  demanded,  and,  with 
the  rend  ting  expansion  <rf  bank  loans,  dqx»t  oirrency 


Sic.3l 


ISAMSRXOM  PBIZ0D8 


187 


(AO)  already  expanded,  exptnds  sUU  moce.  Hcnoe  prioet 
rise  still  further. 
This  sequence  ci  events  taxy  be  hdeBy  rtated  at 

follows :  — 

(i)  Prices  rise  (whatever  the  first  cause  may  be ;  we  have 
chosen  for  illustration  an  increase  in  the  amount  of  mon^ 
in  circulation). 

(3)  "  Enterprisers,"  i.e.,  persons  who  undertake  business 
enterprises  of  various  kinds,  get  much  higher  prices  than 
before,  without  having  much  greater  expenses,  and  therefore 
make  much  greater  profits. 

(3)  Enterpriser-bonowan,  encouraged  by  Uu^  profits, 
expand  their  loans. 

(4)  Deposit  currency  (At)  expands  relatively  to  money 

(5)  Because  of  this  expansion  of  depont  currency  {it) 
prices  continue  to  rise;  that  is,  phenomenon  No.  z  is 
repeated.   Then  No.  2  is  repeated,  and  so  on. 

In  other  words,  a  sli^t  initial  rise  oi  prices  sets  in  motion 
a  train  of  events  which  tends  to  repeat  itself.  Rise  of  prices 
generates  rise  of  prices,  and  continues  to  do  so  8S  long  0$  ike 
enterprisers'  profits  continue  abnormally  high. 

§  3*  Bow  ft  Siio  of  Risos  ChttniliMitw  in  ft  Gfiiift 

The  expansion  in  deposit  currency  indicated  in  this  cu- 
mulative movement  abnormally  increases  the  ratio  of  it 
to  M.  This,  however,  is  not  the  only  disturbance  cansed 
by  the  increase  in  M.  There  are  disturbances  to  some  ex- 
tent in  the  Q's,  in  V,  and  in  F'.  In  particular,  trade  (the 
Q's)  will  be  stimulated  by  the  stimulation  of  kMOS.  New 
constructions  of  buildings,  etc.,  are  entered  upon.  These 
effects  are  always  observed  during  rising  \  lices,  and  people 
note  approvingly  that  "  business  is  good  "  and  "  times  are 
booming."  Sudi  statements  represent  the  point  oi  view 
(tf  the  OTdxnary  biainess  man  wbo  Is  aa  **  c^ej^tisar* 


X88        n«lllNTA«Y  UniCIllM  OF  ECONOMICS  [Qut.X 

aie  dknt  but  loog^iffering,  paying  higher  prices  but 3 
getting  prrportionaUy  higher  Scomes.        ^  ' 
But  the  expansion  cannot  proceed  forever.   It  most 

o^^«  th^  AssoonasUiis 
occure  the  whole  situation  is  changed.  The  banki  i«* 
forced  in  self-defense  to  refuse  loans      at  ^  ra^S  £ 

ST^nlT***^^"^*  for  them)  beLu^ 

^  cannot  stand  so  abnonnal  im  expansion  of  loanTS 
lively  to  reserves.  Then  bonowm  can  no  looser  W 
to  make  great  profits,  and  loans  cease  to  expLd  ^ 

n»^*"  "  '^'^^^^  P^**=^«  »  limitation  on  further  ex- 
pan^on  of  deposit  currencyandfatrodudngatenden^T^^^^ 
traction,  but  those  above  mentioned  are  the  m«t  fa^^^ 
I^w  an  enterprise  as  it  is  started  by  ho^lt^^Tt 
pected  to  be  continued  by  renewed  borrowing.  But  wSi 
loans  hard  to  get,  those  nersons  who  have  count«i  on  « 
newmg  their  loans  on  '  W  terms  a^dfr4tf^« 
amounts  are  unable  to .  It  Mows  t^t  those  of  S 

such  new  debts,  cannot  pay  old  ones  are  destined  to^ 
come  insolvent  and  fail.   The  failure  (or  pioroSrf^f^W 

on  the  part  of  many  depositors  tiiat  the  banks  will  not  be 
ab  e  to  reahze  on  these  loans.  Hence  the  banl^  JC^v« 
feU^und^  suspicion  and  for  this  reason  de^„T^d 

the  banks  have  to  cSffl^ans^ent^'LS!":"' 
w  dsc  become  msolveiit  Some  of  thwi  a»  d«t^  S 


8m.  4l 


««9 


become  bankrupt,  and,  with  their  failure,  the  demand  for 
kNUM  is  ooffeiHpondingly  reduced.  Thii  culminatioa  of  an 
upward  p/ice  movement  is  what  is  called  a  crisis,  a  condi- 
tion characterized  by  failures  which  are  due  to  a  lack  of 
cash  when  it  is  most  needed.  Bankruptcies,  as  shown  in 
Chapter  III,  §  5,  tend  to  qnead  from  ^tor  to  creditor. 

14.  Coopltlloa  €(  th«  Cndtt  Pjfcto 

Alter  the  crest  of  the  wave  is  reached,  a  reaction  sets  in. 
Bank  loans  tend  to  be  small,  and  conaequentty  d^XMits 

(St)  are  reduced.  The  contraction  of  deposit  currency 
makes  prices  fall  still  more.  Those  who  have  borrowed 
for  the  purpose  of  buying  stocks  of  goods,  now  find  they 
cannot  sell  them  for  eiKiugh  even  to  pay  bade  what  they 
hav;  borrowed.  The  sequence  of  events  is  now  the  oppo- 
site of  what  it  was  before :  — 
(i)  Prices  fall. 

(3)  Enterprisers  get  mudi  lower  prices  than  before  with- 
out having  much  lowor  eipeDses,  and  therefore  make  miidt 
lower  profits. 

(3)  Enterpriser-borrowers,  discouraged  by  small  profits, 
contract  their  borrowings. 

(4)  Deposit  Gurxency  {it)  contracts  rdativdy  to  raxmey 

m. 

(5)  Because  of  this  contraction  of  deposit  currency 
(It)  prices  continue  to  fall ;  that  is,  phenomen(m  No.  i  fii 
repeated.   Then  No.  2  is  repeated,  and  so  on. 

Thus  a  fall  of  prices  generates  a  further  fall  of  prices. 
The  cycle  evidently  repeats  itself  as  long  as  the  enterprisers' 
profits  remain  abnormally  low.  The  man  who  loses  most 
is  the  business  man  in  debt.  He  is  the  typical  business 
and  he  now  complains  that  "  business  is  bad."  There  is  a 
**  dq)ression  of  trade." 

The  contractkm  becomes  sdf-limiting  as  soon  as  loans  are 
etu.'vc  to  geL  Banks  are  led  to  make  loua  easy  in  order  to 


get  rid  of  their  accumulated  immrvmm  At* 

conditio,  b^to.^.  ^^^ZJ^l^-  "T^ 

Ixen  forced  out,  or  hav.  a  Vnimm  hn» 

fi™» a« left  l^bmLl^^^.  ^ 

a«a«  become  wilC  tT^W^'^?"'  B"™"™ 

.'nS'dtsrxi^t-^-p-Se':^^^ 

«caj»a«^tmon„,.l,e^„^^.2,^2^ 

-d  ..d  backwfni  -::^ti:'"p^js'"" 

Many  Imtorical  examples  could  be  S  ^ 
of  gold  in  Califomk  in  the  middk  „f  .iT  1  ♦«<''«»»wy 

thenewgldan^O^"^™™"^ 

as  well.   Prices  m«.  "  deposit  currency 

its;  tiott,  Zf^'  busmess  men  mad.  high  pn"^ 

fa  tlie  Vj^S^^^a  "  "^"^  "^"^  both 

««jbSperi«i  SiotStSgr:-;;^^ 

enormousgold  producuSTwvL  to  ' 
and  in  the  Klondit.    ti,.    "™;aai,mCnpple  Creek, 

deposits  subject  to  check  n^Tt^t^  ^Jf^"^^^' 
cent.   "ProsDeritv"  <Vho*  •    ^  ?°rr'  P"*^^^  "^^^e  50  per 
point  of  vSro^^the^nL^?'"1'^"^  ^^"^ 

a^trot^SF^n?--^ 


•k.41 


nAMRioif  fmowi 


191 


swing  of  the  conunerciftl  penduliun  to  and  fro  is  about  ten 
years.  While  the  pendulum  is  a»tinually  seeking  a  stable 

position,  practically  there  is  almost  always  some  occurrence 
to  prevent  perfect  equilibrium.  Oscillations  are  set  up  which, 
though  tending  to  be  self-corrective,  are  continually  per- 
petuated by  Ireih  disturbances. 

The  factors  in  the  equation  of  exchange  are  continually 
seeking  normal  adjustment.  A  ship  in  a  calm  sea  will 
"  pitch  "  only  a  few  times  before  coming  to  rest.  But  in  a 
high  sea  the  {Etching  never  ceases.  While  contiiittally 
seeking  equilibrium,  the  ship  continually  enoountert  causes 
which  accentuate  the  oscillation. 

The  foregoing  sketch  of  prices  gives,  of  course,  only  the 
dementary  features  of  {mce  cydes.  In  any  actual  case 
numerous  special  factors  enter.  The  factors  wbidk  we  have 
studied  are  those  in  the  equation  of  exchange. 


CHAPTER  XI 


BUiOR  IMfLUIMGSI  OM  IBICBt 

I  s.  Iirfhftnftf  wliicli  CondHioM  of  VndutHna  aad  Coa- 
■"—f***^  Bmt  ott  Tnd*  tad  tiMrafori  oa  PikM 

Thus  far  we  have  considoed  the  levd  of  prices  as  affected 
by  the  volume  of  trade,  by  the  vebdty  of  circulatkm  <d 

money  and  of  deposits,  and  by  the  quantity  of  money  and 
of  deposits.  These  are  the  only  influences  which  can  directly 
affect  the  level  of  prices.  Any  other  influences  on  prices 
must  act  through  these  five.  That  are  myriads  of  suth 
influences  f outside  of  the  equation  of  exchange)  that  af- 
fect prices  uirough  the  medium  of  these  five.  It  is  our 
p  upose  in  this  chapter  to  note  the  chief  among  them, 
«i:cepting  those  that  affect  the  vdume  d  money  (10; 
the  latter  will  be  examined  in  the  next  chapter. 

We  shall  first  consider  the  outside  influences  that  affect 
the  volume  of  trade  and,  through  it,  the  price  level.  The 
amditions  which  det^mine  the  extent  of  trade  in  the  world 
or  within  any  particular  area  are  numerous  and  technicaL 
The  most  in^rtant  may  be  classified  as  follows :  — 

I.  Conditions  affecting  produxrs. 

(a)  Geographical  differences  in  natural  resources. 

(6)  The  division  of  labor. 

(c)  Knowledge  of  the  technique  of  productkm. 

{£)  The  accumulation  of  capital, 
a.  Conditions  affecting  consumers. 

(a)  The  extent  and  variety  of  human  wants. 

199 


m 


3.  Ctfudfltow  eemmting  proimtn  and  emummn* 

(a)  Faculties  for  tranqMrUtion. 

(b)  Relative  freedom  of  trade. 

(c)  Character  of  monetary  and  banking  qrttems. 
(i)  BiislneM  confidence. 

1.  (a)  Geographical  differences.  If  all  localities  were 
exactly  alike  in  their  natural  resources,  no  trade  would  be 
set  up  between  them.  Cattle  nUng  in  Teias,  the  produc- 
tion of  coal  in  Penn^vtnia,  of  oranges  in  Florida,  of 
apples  in  Oregon,  etc,  prmnote  trade  am<ng  theie  com- 
munities. 

I.  (6)  Division  of  labor.  By  division  of  labor  b  meant 
the  !^stem  by  which  different  individuals  in  society  per- 
form different  kinds  of  work.  It  is  based  in  part  on  dif- 
ferences in  comparative  costs  or  efforts  of  different  men 
producing  different  goods  —  correqx>nding  to  geographic 
differences  u  between  coimtries.  Because  of  such  differ- 
ences, natural  and  acquired,  some  men  devote  themselves 
to  farming,  others  to  weaving,  others  to  carpentry,  others 
to  mason  work,  plumbing,  typesetting,  moving  pianos,  or 
driving  aftK^lanes,  and  exdiange  their  products. 

I.  (c)  Knowledge  of  tecknique.  Besides  local  and  personal 
differentiation,  the  state  of  knowledge  of  the  means  and 
methods  of  production  will  stimulate  trade.  For  instance, 
mines  of  Africa  and  Australia  were  left  unworked  for  cen- 
turies by  ignorant  natives,  but  were  opened  by  white  men 
possessing  a  knowledge  of  metallurgy. 

I.  (d)  Accumtdation  of  capital.  But  knowledge,  to  be 
of  use,  must  be  applied;  and  its  application  usually  re- 
quires the  aid  of  capital.  Tne  greater  and  the  more  pro- 
ductive the  stock  of  capital  in  any  community,  the  more 
goods  it  can  put  into  Uie  currents  of  trade.  A  mill  will 
make  a  town  a  coiter  c/l  trade.  Docks,  devatm,  ware- 
houses, and  railway  terminak  bc^  to  tranrform  a  harbor 
into  a  port  of  commerce. 


X94     usmNTAsy  sRiNCxms  or  looivoiiics  [cbat.xi 


Since  increase  in  trade  tends  to  decrease  the  general  level 
of  prices,  it  is  obvious  that  anything  wYdda  '  ends  to 
increase  trade  likewise  tends  to  decrease  tht  general  level 
of  prices.  We  conclude,  therefore,  that  arnung  rhc 
various  causes  which  tend  to  decrease  price .  ^  re  greatei 
geographical  or  personal  q)ecialization,  improved  produc- 
tive technique,  and  the  accumulation  of  capital. 

2.  (a)  Extent  and  variety  of  human  wants.  Wants  are, 
as  it  were,  the  mainsprings  of  economic  activity  which  in 
the  last  analjrsis  keep  the  economic  world  in  motion.  The 
desire  to  have  clothes  as  fine  as  the  clothes  of  others,  or 
finer,  or  different,  leads  to  the  multiplicity  of  silks,  satins, 
laces,  etc.;  end  the  same  principle  applies  to  furniture, 
amusemoits,  books,  works  <^  art,  and  every  other  means 
of  gratification. 

The  increase  of  wants,  in  so  far  as  it  leads  to  an  increase 
in  trade,  tends  to  lower  the  price  level. 

§  2.  Influences  which  Conditkmi  Connecting  Rroducw 
and  Coonunm  Bnvt  on  Tmde  and  fbanton  <m 
Pikat 

3.  (a)  Facilities  for  transportation.  As  Macaulay  said, 
with  the  exception  of  the  alphabet  and  the  printing  press, 
no  set  of  invenUons  has  tended  to  alter  civilization  so  much 
as  those  which  abridge  distance  —  sudi  as  the  railway,  the 
steamship,  the  telephone,  the  telegraph,  and  that  conveyer 
of  information  and  advertisements,  the  new^M^ter.  These 
all  tend,  therefore,  to  decrease  prices. 

3.  (b)  Fdaike  freedom  of  trade.  Trade  barriers  are  not 
only  physical,  but  legal.  A  tariff  between  countries  has 
the  same  influence  in  decreasing  trade  as  a  chain  of  moun- 
tains. The  freer  the  trade,  the  more  of  it  there  will  be.  In 
Fnoce,  many  communities  have  a  local  tariff  (octroi)  which 
tends  to  interfere  with  local  trade.  In  the  United  States, 
trade  is  free  within  Uw  country  itself,  but  betweoi  the 


Sk.  a] 


ommeMCBS  on  vaKts 


m 


United  States  and  other  countries  there  is  a  high  protective 
tariff.  The  very  fact  of  increasing  facflities  for  transporta- 
tion, lowering  or  removing  physical  barriers,  has  stimulated 
nations  and  communities  to  erect  legal  barriers  in  their 
place.  Tariffs  not  only  tend  to  decrease  the  frequency  of 
exchanges,  but  to  the  extent  that  they  prevent  intematiooal 
or  interlocal  division  of  labor  and  make  countries  more 
alike  as  well  as  less  productive,  they  also  tend  to  decrease 
the  amounts  of  goods  which  can  be  exchanged.  The  ulti- 
mate effect  is  thus  to  raise  prices.  This  is  the  effect  on 
the  general  level  of  prices.  Besides  this  general  effect  are 
the  particular  effects  on  those  articles  on  which  duties  are 
laid,  but  with  these  particular  effects  we  have  here  nothing 

^Another  sort  of  restriction  on  trade  is  the  "  restraint  of 
trade  "  of  monopolies  or  combinations.  These,  of  course, 
like  any  other  reduction  in  the  amounts  of  goods  sold, 
tend  to'  raise  the  general  level  of  prices. 

3.  (c)  Monetary  and  banking  systems.  The  development 
of  efficient  monetary  and  banking  systems  tends,  among 
other  effects,  to  increase  trade.  There  have  been  times  m 
the  history  of  the  world  when  the  money  was  in  so  uncer- 
tain a  state  that  people  hesitated  to  make  many  trade 
contracts  because  of  the  lack  of  knowledge  of  what  would 
je  required  of  them  when  the  contract  should  be  fulfilled. 
In  the  same  way,  when  people  cannot  depend  oa  the  good 
faith  or  stability  of  banks,  ^wSLhrnizU  to  use  deports 

3.  (d)  Business  confidence.  Confidence,  not  only  in  banks 
in  particular,  but  in  business  dealings  in  general,  is  tndy 
said  to  be  "  the  soul  of  trade."  In  South  America  there 
are  many  places  waiting  to  be  developed  simply  because 
capitalists  do  not  feel  any  security  in  contracts  there.  They 
are  fearful  that  by  hook  or  by  crook  the  fruit  of  any  inveil* 
matte  they  may  xca^  wS  be  takes  frtmi  them. 

We  see,  then,  tliat  pik«  ipiB  tmd  to  faU  thffWi^  n 


X96       EUEMXirCAXY  PIXNOFUES  07  ECONOIIICS  {Cbat.XI 

increase  in  trade,  whidi  may  in  turn  be  brought  about  by 
improved  transportation,  by  increased  freedom  of  trade, 
by  improved  monetary  and  banking  systems,  ^nd  by  busi- 
ness confidence. 

1 3.  Influence  of  Individual  Habits  on  VelodtiM  of 
Circulation,  and  therefore  on  Prices 

Having  examined  those  causes  outside  the  equation 
which  affect  the  volume  of  trade,  our  next  task  is  to  consider 
those  outside  causes  which  affect  the  velocities  of  circulation 
ci  money  and  of  deposits.  For  the  most  part,  the  causes 
affecting  one  of  these  velocities  affect  the  other  also.  These 
causes  may  be  classified  as  follows :  — 

I.  Habits  of  the  individual 

(a)  As  to  hoarding, 

(b)  As  to  book  credit  and  loans, 

(c)  As  to  the  use  of  checks. 

a.  Systems  0/  payments  tn  tke  commimly 

(a)  As  to  frequency  of  receipts  and  of  disbursements, 

(b)  As  to  regularity  of  receipts  and  of  disbursements, 

(c)  As  to  correspondence  between  receipts  and  dis- 
bunemoits. 

3.  General  causes. 

(a)  Density  of  population, 
(ft)  Rapidity  of  transportation. 

I.  (a)  Hoarding.  Taking  these  up  in  order,  we  may  first 
consider  what  influence  hoarding  has  on  the  velocity  of  dr- 
cnUtion.  Velodty  oi  drcalatkm  of  money  is  the  same 
thing  as  its  rate  of  turnover.  It  is  found  (Chapter  Vm, 
§  3)  by  dividing  the  total  payments  effected  by  money  in 
a  jrear  by  the  average  amount  of  money  in  circulation  in 
that  year.  It  b  an  average  of  the  rates  of  turnover  of  the 
individuals  which  compose  the  society.  This  velodty  of 
circulatimi  or  rapidity  of  tumovor  oi  mmty  is  the  gieiU^ 


jjuwvonKaB  as  nxn 


197 


for  each  individual,  the  more  he  expends  with  a  given  aver- 
age amount  of  cash  on  hand,  or  the  less  average  cash  he 
keeps  for  a  given  yearly  expenditure.  One  man  keeps  an 
average  of  $io  in  his  pocket  and  expends  $500  a  year; 
he,  therefore,  turns  over  the  contents  of  his  pocket  fifty 
times  a  year.  Another,  while  expending  the  same  sum 
($500),  keeps  the  more  prudent  average  of  $20;  he,  there- 
fore, turns  over  his  stock  of  cash  only  twenty-five  times  a 

^^me  people  are  by  habit  always  impecunious  or  short  of 
ready  money  and  tend  to  have  a  high  rate  of  turnover; 
others  carry  a  full  purse  and  have  a  slow  rate  of  turnover. 
When,  as  used  to  be  the  custom  in  France,  people  put  money 
away  in  stockings  and  kept  it  there  for  months,  the  vdodty 
of  circulation  must  have  been  extremdy  skm.  Tlat  same 
principle  applies  to  deposits. 

Hoarded  money  is  sometimes  said  to  be  wiUidrawn 
from  circulation,  but  this  is  only  another  way  of  saying  that 
hoarding  tends  to  decrease  the  velocity  of  circulation.  The 
only  real  distinction  between  "hoarding"  money  m  a 
stocking  or  safe  and  "  carrying  "  money  in  a  purse  is  one 
of  degree.   The  money  remains  in  the  stocking  or  safe 
tonger  than  in  the  purse.  In  either  case  it  may  be  said 
to  be  in  circulation,  but  when  "hoarded"  it  circulates 
much  more  slowly.   In  the  case  of  individual  hoards,  as 
of  misers,  it  is  convenient  to  consider  them  as  in  circular 
tion.  Only  in  the  case  of  the  larger  government  hoards  is 
it  worth  while  to  consider  them  as  exdnded  from  money 
in  circulation."  ^ 
I.  (b)  Book  credit  and  loans.  The  habit  of  "  dorm* 
».«.,  using  book  credit,  tend>»  to  inenase  the  velocity  off 
circulation  of  money,  because  the  man  who  gets  things 
"charged"  does  not  need  to  keep  on  hand  as  much  money 
as  he  would  if  he  made  all  payments  in  cash.  A  man  whe 
daily  pays  cask  needs  to  keep  cash  for  daily  contfagendw. 
The  system  of  cash  payments,  unHke  the  systm  ef  book 


198       ELEMENTAXY  PUNCIPLES  OF  ECONOMICS    ICmA>.  XI 


credit,  requires  that  money  shall  be  kept  on  hand  in  advance 
of  purchases.   Evidently,  if  money  must  be  provided  in 
advance,  it  must  be  provided  in  larger  quantities  than 
when  merely  required  to  liquidate  past  debts.    In  the 
system  of  cash  payments  a  man  must  keep  money  idle  in 
advance,  lest  he  be  caught  in  the  embarrassing  position  of 
lacking  it  when  he  most  needs  it.   With  book  credit  he 
knows  that  even  if  he  should  be  cau|^t  without  a  cent 
in  his  pocket,  he  can  still  get  supplies  on  credit.  These 
he  can  pay  for  when  money  comes  to  hand.   As  soon  as 
this  money  is  received  there  is  a  use  awaitmg  it  to  pay 
debts  accumulat  d.   For  instance,  a  laborer  receiving  and 
spending  $7  a  week,  if  he  cannot  "  charge,"  must  make  hit 
week's  wages  last  through  the  week.   If  he  spends  $1  a 
day,  his  weekly  cycle  must  show  on  hand  on  successive 
days  at  least  $7,  $6,  $5,  $4,  $3,  $2,  and  «i,  at  which  time 
another  $7  comes  in.   This  makes  the  average  balance  $4. 
The  rate  of  turnover  (ratio  of  expenditure  to  cash  carried) 
is  $  7  4-  4  or  about  twice  a  week.  But  if  he  can  chaige  every- 
thing, and  then  wait  until  pay  day  to  meet  the  resulting 
obligations,  he  need  keep  nothing  through  the  week,  paying 
out  his  $7  when  it  comes  in.   His  weekly  cycle  need  show 
no  higher  balances  than  $7,  $0,  $0,  |o,  |o,  |o,  |o,  averaging 
only  $1,  and  the  turnover  is  $7  -f-  x  or  seven  times  a  week. 

Analogous  to  book  credit  is  the  use  of  loans  of  any  kind. 
In  a  highly  organized  center  of  trade,  like  the  New  York 
stock  or  produce  exchanges,  credit  is  extended  to  an  extreme 
degree  in  order  to  facilitate  the  transactions  of  a  large 
volume  of  business  without  the  necessity  of  keeping  on 
hand  a  large  cash  balance  of  money  or  deposits  subject 
to  check.  Credit  is  extended  by  loans,  by  aUowing  pur- 
chases on  small  payments  called  "  margins,"  and  in  other 
ways.  All  these  extensions  of  loan  credits  tend  to  Increase 
the  velocity  of  circulation  of  money  and  deposits. 

Through  book  credit  and  loans,  therefore,  the  average 
•moant  of  money  or  bank  deposits  whfch  each  person  must 


Sac.  4}  INILTIINCBS  am  PBXCE8  199 

keep  on  hand  to  meet  a  given  expenditure  is  made  less. 
This  means  that  the  rate  of  turnover  is  increased ;  for  if 
people  spend  the  same  amounts  as  before,  but  keep  smaUer 
amounts  on  hand,  the  quoUent  of  the  amount  spent  divided 
by  the  amount  on  hand  must  incrrase. 

X  (c)  Use  of  checks.  The  habit  of  using  checks  rather 
than  money  will  also  affect  the  velocity  of  irculation  of 
money,  because  a  depositor's  surplus  money  will  immedi- 
ately be  put  in  the  bank  in  return  for  a  ri^t  to  draw  by 
check. 

Banks  thus  offer  an  outiet  for  any  surplus  pocket  money  or 
surplus  till  money,  and  tend  to  prevent  the  existence  of  i<Ue 
hoards.  In  like  manner,  surplus  deposits  may  be  converted 
into  cash  —  that  is,  exchanged  for  cash  —  as  desired.  In 
short,  those  who  make  use  both  of  cash  and  deposits  have 
the  opportunity,  by  adjusting  the  two,  to  prevent  either 

from  being  idle.  .1.    u  u-*  «f 

We  see,  then,  that  these  three  habits  —  the  habit  of 
being  impecunious,  the  habit  of  charging,  and  th"  haiit  of 
using  checks  -  all  tend  to  raise  the  level  of  prices  through 
their  effects  on  the  velocity  of  drculatioii  of  money,  or  of 
deposits. 

1 4.  Influence  of  Systems  of  Payments  on  Velocities 
of  CixcuUtion  and  therefore  on  Prices 

3  (a)  Frequency  of  receipts  and  of  disbursements.  The 
more  frequently  money  or  checks  are  received  and  dis- 
bursed, the  shorter  is  the  average  interval  betwera  the 
recdpt  and  the  expenditure  of  money  or  diecks,  and  the 
more  rapid  is  the  velocity  of  circulation. 

This  may  best  be  seen  from  an  example.  A  change  from 
monthly  to  weekly  wage  payments  tends  to  increase  w 
vdodty  of  circulatioa  of  money.  If  a  laborer  is  paid 
we^  $7,  and  reduces  this  evenly  each  day,  endmg  each 
cn^-haadfid,  his  average  cash,  as  we  have  seen, 


«00       SLEMXNTA&y  fUNCmtS  Of  BOONcama    (Our.  XI 


would  be  a  little  over  half  of  I7,  or  about  I4.  This  makes 
his  turnover  nearly  twice  a  wedu  Under  monthly  pay- 
ments, the  laborer  who  receives  and  spends  an  average 
of  $1  a  day  will  have  to  spread  the  $30,  more  or  less  evenly, 
over  the  following  thirty  days.  If,  at  the  next  pay  day, 
he  comes  out  empty-handed,  his  average  money  during 
the  month  has  been  about  $15.  This  makes  his  turnover 
about  twice  a  month.  Thus  the  rate  of  turnover  is  more 
rapid  under  weekly  than  under  monthly  payments  provided, 
of  course,  the  introduction  of  weekly  payments  does  not 
disturb  some  other  factor  influencing  velocity.  If  it  leads 
to  cash  payments  in  place  of  book  credit,  the  rate  of  turn- 
over may  really  decrease  mstead  of  increasing. 

2.  (b)  Reguiarity  of  receipts  and  of  disbursements.  When 
the  workingman  can  be  fairly  certain  of  both  his  receipts 
and  expenditures,  he  can,  by  close  calculation,  adjust  them 
so  predsdy  as  safdy  to  end  each  payment  cycle  with  an 
empty  pocket.  This  habit  is  extremely  common  among 
certain  dasses  of  city  laborers.  On  the  other  hand,  if 
the  receipts  and  expenditures  are  irregular,  either  in 
amount  or  in  time,  prudence  requires  the  worker  to  keep 
a  larger  sum  on  hand  to  insure  against  mishaps.  Even 
when  foreknown  with  certainty,  irregular  receipts  require 
a  larger  average  sum  to  be  kept  on  hand.  We  may,  there- 
fwe,  conclude  that  regularity,  both  of  receipts  and  of  pay- 
mmts,  tends  to  increase  velocity  of  drcuktion. 

2.  (c)  Correspondence  between  receipts  and  disbursements. 
We  next  consider  the  synchronizing  of  receipts  and  dis- 
bursements, i.e.t  making  the  payments  come  at  nearly  the 
same  times  as  the  times  when  receipts  are  obtamed.  It 
is  manifestly  a  great  convenience  to  the  spender  of  money, 
or  of  deposits,  if  dealers  to  whom  he  is  in  debt  will  allow 
him  to  postpone  payment  until  he  has  received  his  money 
or  his  check.  TUs  amngraient  dliviates  the  necessity  of 
keeping  much  money  or  deposits  on  hand,  and  therefore 
increases  their  velocity  of  drcuktion.  Where  pftymento, 


Sk.  s 


WfLUlMCM  OH  FUCn 


901 


such  as  rent,  interest,  insurance,  and  Uw,  occnr  «l 
periods  ineq)ective  of  the  times  of  lece^ts  of  money,  it 
is  often  necessary  to  accumulate  money  or  deposits  in 
advance,  thus  increasing  the  average  on  hand,  withdrawug 
money  from  use  for  a  time,  and  decreasing  the  vciocity 
of  drcuktion.  . 

We  conclude,  then,  that  synchronizing  and  regulanty  of 
payment,  no  less  than  frequency  of  payment,  tend  to  in- 
crease prices  by  increasing  velocity  of  drculatioii. 

S  5.  InHiMiice  of  0«ii«ral  Cauiet  on  VelodtlM  of  Cbe»- 
Itttion  and  tiienCora  oa  Prices 

3.  (a)  Density  of  popidaiim.   The  more  densely  popu- 
lated a  locality,  the  more  rapid  will  be  the  velocity  of  cir- 
culation, because  there  will  be  readier  access  to  people  from 
whom  money  is  received  or  to  whom  it  is  paid.  In  the 
country,  although  there  arc  no  statistics  on  this  subject, 
the  velocity  of  circulation  must  be  much  slower  than  in  the 
city.   A  lady  who  has  a  dty  house  and  a  country  house 
states  that  in  the  country  she  keeps  money  in  her  purse 
for  weeks,  whereas  in  the  dty  she  keeps  it  but  a  few  days. 
Pierre  des  Essars  has  worked  out  the  velodty  of  circula- 
tion at  banks  in  many  European  dties.  Examination 
his  figures  reveals  the  fact  that,  in  almost  all  cases,  the 
larger  the  town  in  which  the  bank  is  situated,  the  mote 
active  the  deposits.   The  bank  of  Greece  has  a  turnover 
whose  rate  of  rapidity  is  only  four  times  a  year,  while  that 
of  the  bank  of  France  is  over  one  hundred  times  a  year. 

3.  (6)  Rapidity  of  transportation.  Again,  the  more  ex- 
tensive and  the  speedier  the  transportation  in  general,  the 
more  rapid  the  circulation  of  money.  Anything  which 
makes  it  easier  to  pass  money  from  one  person  to  another 
will  tend  to  increase  the  velodty  of  drcolation.  Railways 
have  this  effect.   The  telegraph  has  increased  the  velodty 

of  drcolation  of  deposits,  stnce  these  caa  now  be  trans- 


aoa       ELEMENTARY  PEXNOPLBS  Of  lOOilOMlCi  {CaA».X| 

ferred  thousands  of  miles  in  a  few  minutes.  Mail  and 
express,  by  facU  tating  the  transmission  of  bank  deposiU 
and  money,  have  likewise  tended  to  increase  their  v^dtv 
of  drcolation.  »«wwiy 

We  conclude,  then,  that  density  of  population  and  rapidity 
of  communication  tend  to  increase  prices  by  increasiiw 
vdoaties  of  circulation.  " 

§6.  LifloMCM  oo  Hit  VoioBM  of  Deposit  Current 
and  Hiaref on  on  PricM 

We  have  to  consider  lasUy  the  specific  outside  influences 
on  the  volume  of  deposits  subject  to  check. 
These  are  chiefly:  — 

(1)  TTie  system  of  banking  and  the  habits  oi  the  people 

m  utihzmg  that  system. 

(2)  The  habit  of  charging. 

(1)  Systems  and  habits  of  banking.   It  goes  without  say- 
ing that  a  banking  system  must  be  devised  and  developed 
before  deposits  can  affect  prices  or  even  exist.   The  inven- 
tion of  banking  has  undoubtedly  led  to  a  great  increase  in 
deposits  and  a  consequent  rise  of  prices.   This  has  been 
toie,  m  spite  of  the  fact  that,  as  pointed  out  in  §  i  the 
development  of  efficient  monetary  and  banking  systems 
tends  to  increase  trade  and  to  that  extent  to  lower  the  price 
level.   Here,  as  in  many  other  instances,  the  effects  of 
improving  monetary  and  banking  facilities  are  complex, 
affecting  more  than  one  factor  in  the  equation  of  exchange. 
The  price-raising  effect  is  far  more  rnp<»rtant  than  the 
price-depressing  effect.   In  the  futiire  one  of  the  chief 
<»uses  tending  to  raise  prices  wiU  doubtless  be  the  expan- 
sion of  dqMsits  subject  to  check. 

(2)  Habit  of  charging.  We  have  already  seen  that 
chargmg  "  increases  the  velocity  of  circulation  of  money. 

It  Is  also  a  means  of  increasing  the  volume  of  deposits  sub- 


iMfLuiMCit  cm  men 


ject  to  check ;  that  is,  "  charging  "  is  often  a  prdfaninary 
to  payment  check  rather  than  by  cash.  If  a  customer 
did  not  have  his  obUgations  "  charged,"  he  would  pay  by 
money  and  not  by  check.  The  ultimate  effect  of  the  prac- 
tice of  charging,  therefore,  is  to  Increase  the  ratio  of  check 
payments  to  cash  payments  and  the  ratio  of  deposits  to 
money  carried  (M '  to  M)  and  therefore  to  increase  the 
amount  of  credit  currency  which  a  given  quanUty  of 
money  can  sustain. 

TWs  effect,  the  substitution  of  checks  for  cash  payments. 
Is  probably  by  far  the  most  important  effect  of  "  charging," 
and  exerts  a  powerf  v  influence  toward  raising  prices. 

Anything  which  tends  to  increase  bank  deposits  tends, 
to  that  extent,  to  raise  prices.   Thus  the  creation  of 
"  trusts  "  has  resulted  in  the  issue  of  a  great  mass  of  stocks 
and  bonds  which  are  more  readily  accepted  by  bankers  as 
"  collateral "  for  loans  than  the  stocks  and  hondz  of  tte 
smaller  and  less  known  companies  from  which  the  trusts 
are  formed.  The  consequence  is :  more  bank  loans,  greater 
deposits,  and  a  higher  level  of  prices.   Besides  these  and 
the  other  effects  of  "  trusts,"  which  have  been  mentioned 
dsewhere,  on  the  general  level  ol  prices  there  are  the  more 
obvious  and  direct  effects  on  the  particular  prices  of  the 
goods  dealt  in  by  the  "  trusts."  But  we  have  here  nothing 
to  do  with  particular  prices.  We  may  observe,  however, 
that  when  trusts  raise  particukur  prices  it  does  not  follow 
that  they  raise  the  general  level  of  prices.   Unless  they 
disturb  the  five  factors,  M,  Af,  V,  Y,  or  T,  they  cannot 
affect  the  general  level  of  prices;  for,  in  that  case,  the 
general  level  of  prices,  as  the  equation  of  exchange  shows, 
could  not  be  disturbed  either,  and  the  raising  of  prices  of 
particular  trust-made  articles  would  have  to  result  indi- 
rectly in  lowering  the  prices  of  some  other  good*  CDOUgli 
to  compensate  in  the  general  kvd. 


CHAPTER  xn 


XXMOTE  INFLUENCSS 

(CoKtmuei) 

Is.  latMBct  of  "  The  BafauiM  of  Trad«  "  on  tte 
Qwuitily  of  Uou&y  and  tiMrtfora  on  PrioM 

We^  have  now  considered  those  influences  outside  the 
equation  of  exchange  which  aflfect  the  volume  of  trade  (the 
Q's),  the  velocities  of  circulation  of  money  and  deposits  (V 
and  KO,  and  the  amount  of  deposits  (Af').  We  have  re- 
served for  separate  treatment  in  this  chapter  the  outside 
influaices  which  affect  the  quantity  of  money  (M). 

The  chief  of  these  may  be  classified  as  foOows : — 

(x)  Influences  operating  through  the  exportation  and 
importation  ol  money. 

(2)  Influaices  operathig  through  the  melting  or  mfaitfaig 

of  money. 

(3)  Influences  operathig  through  the  production  and 
consumption  of  mmty  metab. 

(4)  Influences  of  monetary  and  banking  systems. 

The  first  to  be  considered  is  the  influence  of  foreign 
trade  on  the  quantity  of  money  in  a  country  and  therefore 
on  its  price  level.  Hitherto  we  have  confined  our  studies 
of  price  levels  to  an  isolated  community,  having  no  trade 
relati<ms  with  otlwr  communitfes.  la  the  modem  world, 
however,  no  such  community  exists,  and  it  is  important  to 
observe  that  international  trade  gives  present-day  problems 
off  money  and  of  the  price  level  an  international  character. 

904 


Sac.  il 


BBMOTB  IN? LUXNCS8 


30$ 


If  all  coontriet  had  tbdr  own  irredeemable  paper  money  and 
no  money  that  was  acceptable  elsewhere,  price  levels  in 
different  countries  would  have  no  intimate  connecUon. 
Indeed,  the  connection  is  actually  slight  a>  betwven  coon- 
tries  which  have  different  metallic  standards,  for  exam- 
ple, between  a  gold-basis  and  a  silver-basis  country.  But 
where  two  or  more  nations  trading  with  each  other  use 
the  same  standard,  there  is  a  tendency  for  the  price  levdt 
of  each  to  influence  profoundly  the  price  levels  of  the  other. 

The  price  level  in  a  small  country  like  Switzerland  de- 
pends largely  upon  the  price  level  in  other  countries  ;  for  if 
the  price  level  in  these  other  countries  is  hi^r  or  lower 
than  m  Switicriand,  the  difference  will  set  up  trade  currents 
which  will  increase  or  decrease  the  quantity  of  money  m 
Switzerland  and  therefore  raise  or  lower  its  level  of  pncw 
to  correspond  to  the  levels  outside.  Gold,  which  is  the  pri- 
mary or  fun-wdght  money  fa  moat  dviliased  nations,  is  m 
this  way  constantly  sent  from  one  country  or  commumty  to 
another.   When  a  single  smaU  country  is  under  conadera- 
tion,  while  it  is  quite  correct  to  say  that  the  quantity  of 
money  b  that  country  determines  the  price  level,  we  must 
not  f  aU  to  note  that  the  quanUty  of  money  within  its  borders 
is  in  turn  dependent  upon  the  level  of  prices  outside.  An  in- 
dividual country  bears  the  same  relation  to  the  world  that  a 
lagoon  bears  to  the  ocean.  The  level  of  the  lagoon  depen<b, 
of  course,  upon  the  quantity  of  water  in  it.   But  the 
quantity  of  water  in  it  depends  in  turn  upon  the  level  of  the 
ocean.  As  the  tide  in  the  outside  ocean  rises  and  falls,  the 
quantity  of  water  m  the  kgoon  will  adjust  itself  accordmgly . 

To  simplify  the  problem  of  the  distribution  of  money 
among  different  communities,  we  shall,  for  the  time  b^, 
ignore  the  fact  that  money  consists  ordinarily  of  material 
capable  of  nonmonetary  uses.  We  shall  therefore  omit 
consideration  of  the  disappearance  of  money  through 
melting ;  likewise,  for  the  present,  we  shall  omit  considera- 
tion of  the  production  of  money  through  minting. 


m6    tUMtNXA&Y  VMikann  or  looNoiiicf  |CfeA».aai 

Let  us,  then,  conitder  the  cauies  that  determine  the 

quantity  of  money  in  a  state  liJte  Connecticut.   If  the  level 
of  prices  in  Connecticut  temporarily  falls  below  that  of 
the  surrounding  states,  Rhode  Island,  Massachusetts, 
and  New  York,  the  effect  is  to  cause  an  export  of  money 
from  these  states  to  Connecticut,  because  people  will 
goods  wherever  they  are  cheapest  and  sell  them  wherever 
they  are  dearest.   With  its  low  prices,  Connecticut  becomes 
a  good  place  to  buy  from,  and  a  poor  place  to  sell  m.  But 
if  outsiders  buy  of  Connecticut,  they  will  have  to  bring 
money  to  buy  with.    There  will,  therefore,  be  a  tendency 
for  money  to  flow  to  Connecticut  until  the  level  of  prices 
there  rises  to  a  level  which  will  arrest  the  i  iflux.   If,  on 
the  other  hand,  prices  in  Connecticut  are  higher  than  in 
surrounding  states,  it  becomes  a  good  place  to  sell  m  and  a 
poor  one  to  buy  from.   But  if  outsiders  seU  in  Connecticut, 
they  will  receive  money  in  exchange.   There  is  then  a  tend- 
ency for  money  to  flow  out  of  Connecticut  unti  the  level 
of  prices  in  Connecticut  is  lower.    In  general,  money  flows 
away  from  places  where  the  level  of  prices  is  high,  and  to- 
wards places  where  it  is  low.'  Men  sell  goods  where  they 
can  get  most  money,  and  buy  goods  where  they  wffl  have 
to  give  least  money.   We  say  "  money,"  for  m  the  long 
run  we  do  not  need  to  consider  the  interflow  of  bank  de- 
posits; as  we  have  seen,  in  the  long  run  deposit  currency 
m  each  country  will  maintain  a  definite  istio  to  aoney. 
In  the  long  run  an  increase  or  decrease  of  money  in  a 
country  will  increase  or  decrease  its  deposits. 

But  it  must  not  bf  inferred  that  the  prices  of  various 
articles  or  even  the  gtr.  .al  level  of  prices  wS  become 
precisely  the  same  in  different  countries.  Distance,  igno- 
rance as  to  where  the  best  markets  are  to  be  found, 
tariffs,  and  costs  of  transportation,  help  to  maintam 
price  differences.  The  native  products  of  each  region 
tend  to  be  cheaper  in  that  region.  They  are  exported  as 
long  as  the  excess  of  prices  abroad  is  enough  to  man  Hhui 


tec.  il 


BBMOn  IMfLUlUCM 


cover  the  cost  of  transporUtion.  Ordinarily  a  commodity 
will  not  be  exported  at  a  price  which  wiU  not  at  least  be  equal 
to  the  price  m  the  cmUry  of  origin,  phu  tke/niikt.  Mmy 
coBunodities  are  shipped  only  one  way.  Thus,  wheat  is 
Aipped  from  the  United  States  to  England,  but  not  from 
England  to  the  United  States.  It  tends  to  be  cheaper  in 
the  United  SUtes.  Large  exporUtioiis  rdw  iU  price  in 
Ameika  toward  the  price  in  England,  but  the  American 
price  will  usually  remain  below  the  English  price  by  the 
cost  of  transportation.  A  few  commodities  may  be  sent 
in  either  direction,  according  to  market  conditiont.  ^ 

But,  i#ritniigh  international  or  interlocal  trade  will  never 
bring  about  exact  uniformity  of  price  levels,  it  will,  to  the 
extent  that  it  exists,  produce  an  adjustment  of  these  levels 
toward  uniformity  by  regulating,  in  the  manner  already 
described,  Ae  distribution  of  money.   If  one  commodity 
enters  to  any  considerable  extent  into  international  trade, 
it  alone  will  suffice,  though  slowly,  to  act  as  a  regulator 
of  money  distribution ;  for,  in  return  for  that  commodity, 
money  may  flow,  and,  as  the  price  level  rises  or  falls,  the 
quantity  of  that  commodity  sold  is  correspondingly  adjusted. 
In  ordinary  intercourse  between  nations,  even  when  a  de- 
Uberate  attempt  is  made  to  interfere  with  it  by  protective 
tariffs,  there  will  always  be  a  large  number  of  commodities 
thus  acting  as  outlets  and  inlets.   And  since  the  quantity 
of  money  itself  affects  prices  for  all  sorts  of  commodities, 
the  regulative  effect  of  international  trade  applies,  not 
simi^y  to  the  commodities  which  enter  into  that  tra(te, 
but  to  all  others  as  well.   It  follows  that  nowadays  interna- 
tional or  interlocal  trade  is  constanUy  regulating  price 
levels  throughout  the  world. 

We  must  not  leave  this  subject  without  emphasiatnf 
the  effects  of  a  tariff  on  the  purchasing  power  of  money. 
When  a  country  adopts  a  duty  on  imports,  the  toidency  is 
for  the  level  of  prices  in  that  country  to  rise.  A  tariff 
obviovolyfa^  the  prices  d  the  "protected  "goods.  Tbns 


ao8      njEMBNTARY  MWOPIW  Of  .COlWailCS  kUur.ZD 

high  dtttia  on  wool  and  woolen  goods  have  kept  Amer- 
ican pnces  of  wool  and  woolens  higher  than  Emo^ 

to  raise  the  pnces  of  unprotected  goods.    Thus,  the  tariff 
fort^usesadec^aseinhnports^  This  sudden  decreaSk 
imports  wiU  lead  to  a  corresponding  but  gradual  decrease 
^^g'-^^d^^^h^-konlports^niawS 

SS^^chftST*^'^  T""^  ^  "^"^h  as  before^ 

•nils  unchecked  buymg  of  goods  means  unchecked  exDort 
of  goods  while  the  hnports  have  suddenly  bS^S 
^  wiU  result,  therefore,  .  temporary  4ess  of^^ 

favorable  balance  of  trade,  that  is,  a  net  inflow  S 
money  This  inflow  will  eventuaUy  raiU  the  pS  ,1^ 
a^ne  of  ^otected  goods,  but  of  unpLected  g^cS^'w^^ 
Tie  nae  will  contmue  till  it  reaches  a  point  high  enough  to 
put  a  stop  to  the  "favorable"  bahiSce  of  Lde,^ti^^ 
»,  until  foreigners  cease  to  send  in  their  money. 

A^Aoigh  the  "  favorable  balance  »  of  trade  created  by 
»toriff  is  temporary,  it  leaves  behmd  a  permanent  in- 
^  of  money  and  of  prices.  Hiis  is,  per£ps,T  ch^ 
reason  why  a  protective  tariff  seems  ti  many  a  ca^S 

^^^'d^  ^^^^u  ^  ^^P^'^'y  stimulus  not  only  to 
^^ed  industnes,  but  to  trade  in  general,  which  is  m 

^reahtysimplythestimulusof  money  Nation.  The 

wuntries    Tlus  is  doubUess  one  reason  why  American 
wages  and  pnces  are  higher  than  English. 
We  have  shown  how  the  intematiomd  or  hiteriocal 

^tojbution  of  money  alone.  But  it  may  also  be  disturbed 
by  ^g«  m  the  volume  of  bank  deposite,  or  in  the  velod  y 
o  arculation  of  money,  or  m  the  vetedty  of  cfrculaS 
of  bank  deposits,  or  in  the  vohime  ci  twde.  ButiSS^ 


ItHOn  DltLDXNCIS 


309 


may  be  the  aooxoe  of  the  difference  in  price  leveb,  equi- 
librium will  eventually  be  restored  through  an  international 
or  mterlocal  redistribution  of  money  and  goods  brought 
about  by  international  or  interlocal  trade.  Elements  in 
the  equation  of  exchange  other  than  money  and  com- 
moditiei  cannot  be  tianqmted  from  one  place  to  another. 

I  a.  Influence  of  Melting  and  Mhiting  on  the  Quantify 
of  Money  and  therefore  on  Prices 

We  have  seen  how  Jf  in  the  equation  of  exchange  is 
affected  by  the  importation  or  exportation  of  money. 
Considered  with  reference  to  the  Jf  in  any  one  of  the 
countries  ocmoamed,  tlw  JTs  in  all  the  othm  are  "  outside 

influences." 

Proceeding  now  one  step  farther,  we  must  consider  those 
influences  on  M  that  are  not  only  outsicte  <rf  the  equation 
iA  exdiange  for  any  particular  country,  but  also  outside 
that  for  the  whole  world.  Besides  the  monetary  inflow  and 
outflow  through  importation  and  exportation,  there  is  an 
inflow  and  outflow  through  mintmg  and  mdting.  Tsl  other 
wwds,  not  only  do  the  stodu  of  money  in  the  world  connect 
with  each  other  like  interconnecting  bodies  of  water,  but  they 
connect  in  the  same  way  with  the  outside  slock  of  bullion. 
In  the  modem  world  one  of  the  predom  metals,  such  as 
gold,  usually  idays  the  part  of  pcfanary  taaaey,  and  thb 
metal  has  two  uses  —  a  monetary  use  and  a  commodity  use. 
That  is  to  say,  gold  is  not  only  a  money  material,  but  a 
commodity  as  well.  In  their  character  of  commodities,  the 
preckms  metals  are  raw  materials  for  jewdry,  wodcs  of 
art,  and  other  products  into  which  they  may  be  wrought. 
It  is  in  this  unmanufactured  or  raw  state  that  they  are 
called  bullion. 

Gold  money  may  be  diaageJ  into  gold  faoBiaa,  and 

vice  versa.  In  fact,  both  changes  are  gomg  on  constantly, 
for  if  the  vahie  of  goU  as  compared  with  other  commodities  is 


aZO       ELKMENTAav  PMNOPLES  0»  MONOMKS  (Cbat.XH 

greaterintheoMuaetlianmtheotte^ 

17cJ7^a''k'^^^'  ^  "^^'^  profitable,  and  the  marked 
Sl^lS  ^f^'^y'  ^  of  gold  money  will  determine 
the  Election  of  the  flow.  Since  loo  ounces  of  gold,  A  fine 
can  be  transformed  into  i860  goid  dollais,  the  maifcet  valu^ 
of  so  much  gold  buUion,  A  fine,  must  tend  to  be  I1860  H 
It  costs  nothing  to  have  bullion  coined  into  money,*and 
lurthmg  to  melt  money  into  bullion,  there  will  t  an 
autonmtic  flux  and  reflux  ftom  nnmcy  to  buffion  and 
from  bulhon  to  money  that  will  prevent  the  price  of 
b|Uhon  from  varying  greatiy.  On  the  one  hand,  if  the 
^  ^  greater  than  the  money  which 

could  be  mmted  from  it,  for  instance,  if  loo  cnmces  of  gold 
seU  for  I1861,  the  users  of  gold  who  require  bulBoS- 

t^^ifi^lf^T'^  "^""^  by  melting 

fi86oofgoWcofafatoxwouncesofbum^^^  Contrariwise, 
If  the  pnce  of  bnllkm  is  less  than  the  value  of  gold  coin 
say  «i8s9,  the  owners  of  buUion  will  save  the  |i  diffetenci 
by  taking  100  ounces  of  bullion  to  the  mint  and  havine  it 
^into  i860  gold  dollars.    The  effect  of  melting  coii 
<m  the  one  hand,  is  to  decrease  the  amount  of  gold  mone^ 
and  mcrease  the  amount  of  gold  buUion,  thereby  kmering 
thej^ue  of  gold  as  buUion  and  raising  the  value  of  gold 
M  mooey ;  and  thereby  also  lowering  the  price  level  and 
r«tonng  the  equaUty  between  buOioii  and  money.  The 
effect  of  mintmg  buUion  into  com  is,  by  the  opporite  pro- 
c^.  to  brmg  the  value  of  gold  a.  coin  «id  titevahTrf 
gold  as  buUion  into  equUibrium. 

When  a  charge  caUed  «  seigniorage  "  is  made  for  changing 
bulhon  into  com,  or  where  the  process  involves  expeoM  « 
dday,  the  flow  of  buUion  into  currency  wUI  be  to  that  extent 
^eded  But  under  a  modem  system  of  free  coinage  and 
with  modem  methods  of  reducing  com  to  buUion,  both 
meltmg  and  mmtmg  may  be  performed  so  inexpearfvdy 
^dso  qmckly  that  there  is  pracUcaUy  no  ^VdSy 
favohred.  In  fact,  there  arc  few  instances  ol  more  canrt 


bed  lanxB  MKOiMcn  ns 

price  adjustment  than  tlu  adjustment  between  gold  bulliui 
and  gold  coin.  It  follows  that  the  quantity  of  money,  and 
therefore  its  purchasing  power,  is  directly  dependent  on 
that  of  gold  bullion. 

This  stability  of  tlie  price  of  gold  bullion  eqaessed  in 
gold  coin  causes  confusion  in  the  minds  of  people,  giving 
them  the  erroneous  impression  that  there  is  no  diange 
in  the  value  of  money.  Indeed,  this  stability  has  often 
been  dted  to  show  that  gold  is  a  stable  standard  of  vahie. 
Dealers  in  objects  made  <rf  gold  seem  to  misunderstand 
the  significance  of  the  fact  that  an  ounce  of  gold  (-^  fine) 
always  costs  $18.60  in  the  United  States  or  {\l  fine)  £3, 
175.,  loid.  in  England.  This  means  nothing  more  than 
the  fact  that  gold  In  one  torn  and  measured  in  one  way 
will  always  bear  a  constant  ratio  to  gold  in  another  form 
and  measured  in  another  way.  An  ounce  of  gold  bullion 
is  worth  a  fixed  number  of  gold  dollars,  for  the  same  reason 
that  a  poond  sterling  of  gold  is  worth  a  &Eed  mnaber  o< 
gold  dollars,  or  that  a  ton  of  large  steel  ingc^  k  wwtibt  a 
fixed  number  of  poimds  of  small  steel  ingots. 

Except,  then,  for  extremely  slight  and  temporary  fluctu- 
ations, gold  buOioa  and  g(M  maaey  must  always  have  ^ 
same  value.  Therefore,  in  the  following  discussion  re- 
specting the  more  considerable  fluctuations  affecting  both, 
we  shall  speak  of  these  values  interchangeably  as  "the 
value  of  gold.'' 

§3.  Influence  of  the  Production  and  Consumption  of 
Money  Metals  on  tlw  QnaatiQr  of  Monoj  and  thore- 
fore  on  Prices 

The  stock  of  bullion  is  not  the  tdtimate  outside  influence 
on  the  quantity  of  money.  As  the  stock  of  bullion  and  the 
stodc  of  money  influOK*  tadk  other,  so  the  ^jtal  ttoA  of 
both  is  itself  influenced  by  production  and  consumption. 
The  production  of  gold  consisU  ia  the  output  of  the  mines, 


aX2      ELEMENTARY  PBINCIPLES  Of  ECONOMICS    (Cltf.  XII 


which  constantly  tends  to  add  to  the  exiiting  stocks  both 

of  bullion  and  coin.  The  consumption  of  gold  consists 
in  the  use  of  bullion  in  the  arts  by  being  wrought  into 
jewehy,  gilding,  etc.,  and  in  losses  of  coin  by  abrasion,  ship- 
wreck, etc  If  we  consider  the  amount  of  gold  coin  and 
bullion  as  a  sort  of  reservoir,  production  would  be  the  in- 
flow from  the  mines,  and  consumption  the  outflow  to  the 
arts  and  by  destruction  and  loss.  To  the  inflow  from  the 
mines  should  be  added  the  re-inflow  from  forms  of  art  into 
which  gold  had  previously  been  wrought,  but  which  have 
since  become  obsolete.  This  i"  illustrated  by  the  business 
of  producing  gold  bullion  by  burning  gold  picture  frames. 

We  shall  consider,  first,  the  inflow  or  production,  and 
afterward  the  outflow  or  consumption.  The  regulator 
of  the  inflow  (which  practically  means  the  production  of 
gold  from  the  mines)  is  its  estimated  cost  of  production. 
Wherever  the  estimated  cost  of  producing  a  dollar  of  gold 
is  less  than  the  existing  value  of  a  dollar  in  gold,  the  gold 
will  (normally)  be  produced.  Wherever  the  cost  of  pro- 
duction exceeds  the  existing^  value  o'  a  dollar,  the  gold 
will  (normally)  not  be  produced.  la  the  former  case  the 

production  of  gold  is  profitaUe;  k  the  latter  it  is  unptofit- 
able. 

This  holds  true,  in  whatever  way  cost  of  production  is 
measured,  whether  fai  terms  of  gold  itself,  or  in  terms  of 
some  other  commodity  such  as  wheat,  or  of  commodities 
in  general.  In  gold-standard  countries  the  gold  miner  does 
actually  reckon  the  cost  of  producing  gold  in  terms  of  gold. 
From  his  standpoint  it  is  a  needless  complication  to  trans- 
late the  cost  of  production  and  the  value  of  the  product 
into  some  other  standard  than  gold.  He  is  interested  in 
the  relation  between  the  two,  and  this  relation  will  be  the 
same  whichever  standard  is  employed.  To  fllustrate  how 
the  producer  of  gold  measures  everything  in  terms  of  gold, 
suppose  that  the  price  level  rises.  He  will  then  have  to 
pay  more  dollars  for  wages,  machinery,  fuel,  etc.,  while  the 


Sk.31 


imon  iMfLUXMCxs 


pdoes  obtained  for  his  produd  (expressed  in  those  same 
doUaxs)  will,  as  always,  remain  unchanged.  Convendy, 
a  M  in  the  price  level  will  lower  his  cost  of  production 
(measured  in  dollars),  while  the  price  of  his  product  will 
still,  as  always,  remain  the  same.  Thus  we  have  a  van- 
able  number  expressing  the  coat  of  fnoductkm  and  a  eoiukmt 
number  eipresdng  the  price  oi  gold  product. 

If  we  express  the  same  phenomena,  not  in  terms  of  gold, 
but  in  terms  of  wheat,  or  rather,  let  us  say,  in  terms  of  goods 
in  general,  we  shall  have  the  opposite  conditiGms.  Ttoi 
a  foU  in  the  pnct  level  cannot  be  said  to  affect  his  cost  of 
production  (measured  in  goods),  while  the  "  price, "  or 
purchasing  power,  of  his  product  over  goods  will  rise.  A 
constant  number  expresses  the  cost  of  gold  and  a  vanaHe 
number,  its  price  purchasing  power). 

Thus  the  comparison  between  price  and  cost  of  production 
is  the  same,  whether  we  use  gold  or  other  commodities  as  our 
criterion.  In  the  one  view  —  ».«.,  when  prices  of  labw  and 
onnmodities  are  measured  in  gdd  —  a  rise  of  these  prket 
appears  as  a  rise  in  the  gold  miner's  cost  of  production  — 
the  money  cost  to  him  of  labor  and  materials  —  while  the 
price  of  Ids  product,  gold,  appears  constant ;  in  the  othn 
view— j.e.,  when  labcnr  and  commodities  are  measured  in 
other  goods  —  the  same  phenomenon  is  expressed  as  a  fall 
in  the  purchasing  power  of  his  product,  gold,  while  the  cost 
of  labor  and  materiab  in  terms  of  themselves  is  the  constant 
quantity.  the  one  vkwhb  costs  rise  rdativdy  to  his  prod- 
uct ;  in  the  other  his  product  falls  relatively  to  his  costs. 
In  either  view  he  will  be  discouraged.  He  will  look  at  his 
troubles  in  the  former  light,  *.«.,  as  a  rise  in  the  cost  of 
productkm;  but  we  shall  find  it  more  useful  to  look  at  them 
in  the  hitter,  as  a  fall  in  the  purchasing  power  of  the 
product.  In  either  case  the  comparison  is  between  the  cost 
of  the  production  of  gold  and  the  purchasing  power  of 
gold.  If  this  purdiasing  power  is  above  the  coat  ol  pto- 
dttctioa  in  any  partiadar  iiiiiie»  it  ivffl  pay  to  walk  tktt 


n^.  If  the  purchasing  power  of  gold  is  lower  than  the 

So  much  for  the  inflow  of  gold  and  the  conditions  regulat- 
fag  it    We  turn  next  to  outflow  or  consumption  of  gold 
m  has  two  fonn.,  viz..  con«miption  in  the^arts  a^^^I 
iumption  for  monetary  purposes. 

m^ir  "iT^^^'  consumption  in  the  arts.  If  objects 
^of  gold  are  dieap-that  is,  if  th«  prices  of  oS 

'f^'''^^  high  -  then  the  relative  cheapness 
of  the  gold  objects  will  lead  to  an  increase  in  thefr^ 
^da>nsumpUon.  Expressing  the  matter  in  terms  of  mon^ 
pnccs,  when  pnces  of  everything  else  are  higher  and  people's 
facames  are  likewise  higher,  while  gold  leaf  and  goKl! 

sT^nr'^.f  ,       ."^^  P""*'  ^  «««  con- 

sume  more  gold  leaf  and  ornaments. 

These  are  instances  of  the  consumption  of  gold  in  the 

torn  of  commodities    Tie  consumption  and  loss  ofgold 

Z  ^b'^on  "  (gradual  waste  by  w^- 

ing  or  rubbmg  agamst  other  .coins  or  the  hands  pocket 
or  purse)  of  loss  by  shipwreck  and  other  acddent^.^'Sey 

^ r.T!-?-.  *  ^  8«W  in  use  and 

m  Its  rapidity  of  exchange. 

anu  ^  ff^'  ?r!?'^'  ^  purchasing  power  or  value  of 
gold,  affects  both  consumption  and  production.  It  stimu- 
Utes  consumption  (that  is,  the  turning  of  bulKon  fcto 
articles  of  commerce) ;  and  it  dfacour^es  prodiLC 
An  mcrease  of  purchasing  power,  of  couL,  Lts  iT^e 
SS^T^r^'  consumption  and  production 

^l^r^^  .P^**'  Consmnption,  or  the  with- 
dw^l  of  bulhon  mto  commerce,  raises  the  purchasing 
power  of  what  IS  left,  while  production  fcom  the  mini 
towers  the  purchasing  power. 

jn*  purchasing  power  of  money,  being  thus  played  upon 
by  the  opposing  forces  of  productfcm  and  conJumptionVfa 
dnven  up  or  down  as  the  case  may  be. 


8k  4l 


imon  IMfLUIMGIS 


•1$ 


§4.  M«diiBiad  mottialion  of  tlMM  Iaflti«MiM 

In  any  complete  picture  of  the  forces  determining  the 
ptirchasing  power  of  money  we  need  to  keep  prominently 
in  view  three  groups  of  factors :  (i)  the  production  or  the 
"  inflow"  of  gold  (».«.,  from  the  mines) ;  (2)  the  consimiiptioii 
or  "  outflow  "  (into  the  arts  and  throuc^  destruction  and 
loss) ;  and  (3)  the  "  stock  "  or  reservoir  of  gold  (^lethcr 


Wn.  IS. 


coin  or  bullion)  which  receives  the  inflow  and  suffers  the 
outflow.  The  relations  among  these  three  sets  of  magni- 
tudes can  be  set  forth  by  means  of  a  mediaolcal  iBurtratioii, 
as  shown  in  Figure  13.  This  represents  two  connected  res- 
ervoirs of  Uquid,  G»  and  G,.  The  contents  of  the  first 
reservoir  represent  the  stock  of  gold  bullion,  and  the  con- 
tents of  the  second  the  stodt  of  gold  money.  Since  pur- 
chasing power  increases  with  scarcity,  the  distance  from 
the  top  of  the  cisterns,  00,  to  the  surface  of  the  Uquid 
(which  evidently  increases  as  the  liquid  grows  more  scarce) 
is  taken  to  represent  the  purdianng  power  gold  over 
oUier  goods.  A  lowering  of  the  level  of  the  liquid  indicates 
the  corresponding  increase  in  the  purchasing  power  of 


at6    SLumAiY  pmnopies  of  bcokokics  {CMtf.xn 

money,  since  we  measure  this  Durchasinir  nnwr  Am,..,  i 

l^theUne  (X>  to  the  surface'of  r^ui^'TfZ^ 
•ttca^  to  reproent  other  forms  of  currency  expUdtly  in 
the  dia«i»m.  Wehaveieaithatnormany  thequantitiwof 
other  currenqr  are  proportional  to  the  quantity  of  primary 

^tSfiL''^''^i.'''  "\^"PP<«i»«  to  be  gold.  ThereforTSe 
imriatoi  hi  the  purchasing  power  of  this  primary  money 
may  be  taken  as  representative  of  the  variation  of  all  the 
ourency.  The  cistern  G,  must  be  of  such  a  form^ 
vnU  make  the  distance  of  the  Uquid  surface  below  00  de- 
CT««*c^th  an  mcrease  of  the  liquid,  in  exactiy  the  same  way 
2^  P**rchastngpawer  of  gold  decreases  with  an  increase  in 
tts  9«a»/,/y  That  is,  as  the  quantity  of  liquid  in  G 
doubles,  the  distance  of  the  surface  from  the  line^OO  should 

A?!^K^,r'if-  ^  a  similar  mamier  Uie  form  of 
the  gold  bulhon  dstem  must  be  such  as  will  make  it  rep- 
resent faitiifully  the  facts  for  which  it  standsTXt  is  ft 
must  be  such  diat  th.  distance  of  the  liquid  surface  betow 
OO  wiU  decrease  with  an  increase  of  tiie  Uquid  exactly  as 
the  value  of  the  gold  bulHon  decreases  with  an  increa^  L 

need  not,  and  ordinarily  will  not,  be  the  same,  for  we  can 
scarcely  suppose  tiiat  doubling  the  amount  of  buUion  in 
exatence  will  always  exactly  halve  its  purchasing  power. 

Uoth  reservoirs  have  inlets  and  outlets.   Let^M  con- 
sider tnose  belonging  to  the  bullion  reservoir  (G,)  Here 
eadi  inlet  represents  a  particular  mine,  supplying  bulUon 
and  each  outlet  represents  a  particular  use  LTLTc^^: 

^tance  from  00.   There  are,  therefore,  three  sets  of  di». 
^JT^  'J"'  inlet-distances,  the  outlet-distan^ 
the  Hquid-surfaceHiistances.    Each  inlet-distance  rq)! 
r^nts  the  cost  o  production,  measured  in  goods,  ^ 

XwSS^m"?''         ««^J^t-distance  reprient; 

^^^^  »°      particular  use 
'^"wented,  likewise  measured  m  goods.  The  surface- 


8K.4I 


917 


diiUiice,  as  we  have  already  eiplained,  repfSMBti  tbe  vitot 
of  bttOkm,  Hk«wii.e  nMMand  k  toodt— in  oOmt  wofds, 

Its  puichasing  power. 

It  fa  evident  that  among  these  three  sets  of  leveto  there 
will  be  discrepancies.  These  discrepancies  serve  to  inter- 
pret the  rdative  sUte  of  things  as  bullion  flows  in  and  out 
K  an  inlet  at  a  given  moment  be  above  the  surface-level,  ».e., 
at  a  less  distance  from  00  than  is  the  surface,  the  interpre- 
tation is  that  the  cost  of  production  fa  less  than  the  purchas- 
ing power  of  the  bullion.  Hence  the  mine  owner  will  turn  on 
hfa  spigot  and  keep  it  on  until,  perchance,  the  surface-level 
rises  to  the  level  of  his  mine  —  i.e.,  until  the  surface-dfatance 
from  00  fa  as  small  as  the  inlet-dfatance  —  fai  other  words, 
until  the  purchasing  power  of  bullion  fa  as  small  as  the  cost 
of  production.   At  thfa  point  there  fa  no  longer  any  profit  in 
mining.   So  much  for  inlets ;  now  let  us  consider  the  outlets. 
If  an  outlet  at  a  given  moment,  be  below  the  surface-level, ».«., 
at  a  greater  distance  from  00,  the  interpreUtion  fa  that  the 
value  of  gold  in  that  particular  use  is  greater  than  the  pur- 
chasing power  of  bullion.   Hence  gold  bullion  will  flow  into 
those  uses  where  its  value  may  happen  for  the  moment  to 
be  greater  than  its  vahie  as  buQion.  That  is,  it  wiU  flow 
out  of  all  outlets  bdow  the  surface  in  the  reservoir. 

It  fa  evident,  therefore,  that  at  any  given  moment,  only 
the  inlets  above  the  surface-level,  and  only  the  outlets 
bdow  it,  will  be  called  into  operation.  As  the  surface 
rises,  therefore,  more  outlets  will  be  brought  into  use,  but 
fewer  inlets.  That  fa  to  say,  the  less  the  purchasing  power 
of  gold  as  bullion,  the  more  it  will  be  used  in  the  arts,  but 
the  less  pn^uUe  it  will  be  for  the  mines  to  produce  it, 
and  the  smaller  will  be  the  output  of  the  mines.  As  the 
surface  falls,  more  inlets  will  come  into  use  and  fewer  out- 
lets. 

We  turn  now  to  the  money  reservoir  {Gj.  Tm  net 
tiiat  gdd  has  the  same  vahie  either  as  bullion  or  as  coin, 
becaoie  of  the  interfow  betnem  them  is  represented  in  the 


2iS    nmiNTABY  nuMcmBs  or  komoiiics  Km»,xn 

diagram  by  connecting  the  bulBon  and  coin  reservoirs  in 
consequence  of  which  the  stock  in  both  wiU  (like  water)  find 
aoimmon  level  jthe  siL-face  of  the  Hquid  in  both  reservoirs 
wffl  be  the  tune  distance  below  the  line  00,  and  this  distance 
reprwents  the  v«hie  of  gdd  (or  its  pichasbg  p^wS 
Should  the  inflow  at  any  time  exceed  the  outflow,  thriesult 

I^i'^'^^i.^  ^^^^^^  ^  the  stock  of  gold  in  exist- 
ence. Thfa  WiU  tend  to  decrease  the  purchasing  power  or 

^rJ'^^  the  «,rface  rises,  fei^rinle J 

and  more  outlets  will  operate.  That  is,  the  excessive  inflow 
on  the  one  hand  will  decrease,  and  the  deficient  outflow 
or  consumption  on  the  other  hand  wiU  increase,  checking 
the  mequahty  between  the  outflow  and  inflow.  If,  on  the 
other  hand  the  outflow  should  temporarUy  be  greater 
than  the  mflow,  the  reservoir  will  tend  to  become  l^uD 

outfow  wiU  be  checked,  and  the  deficient  inflow  stimulated 
-restoring  equihbnum.   The  exact  pomt  of  eqi^^rium 

PwAAm  smngmg  back  and  forth  abota  a  position  of 
equflibriujn,  there  WiU  always  be  a 
It  need  scarcely  be  said  that  our  mechanical  diagram 

?^Lr;^*  ir.^;!.?^''*^^  P^^^^^^^  ^^^er  discussion, 
ifi^f  JT***"'*  "  '^^t,  or  add  any  new 

7™f*'„°°^should  one  pretend  that  it  include  oc- 

phaUy  a«  the  factors  which  need  to  be  considered.   But  it 

^iT^  ^^  -^^  in  deter- 

the  purchaamg  power  erf  money.  It  enables  us  to 

First,  if  there  be  an  increased  production  of  gold  —  due 

niethods  of  wovmg  old  ones -this  may  be  reprinted 
^  an  mcrease  in  the  number  or  size  of  the  inletTinto  the 
l»dHoii  reservoir;  the  result  will  evidentiy  be  an  inoeaae 


9K.4 


UMOis  nnumf  GBf 


of  "  bflow  "  into  that  reservoir,  and  from  thtt  Into  tte 
cuRcnqr  renrvoir,  a  oomeqiiait  gradual  fiUiBg  up  of  both, 

and  therefore  a  decrease  in  the  purchasing  power  of  money. 
This  process  will  be  checked  finally  by  an  increase  in  con- 
sunq)tion  and  by  discouraging  producti«m.  Whoi  pfo- 
diictkm  and  consttiiq>ti<m  become  equal,  an  equilibrium  will 
be  established.  An  exhaustion  of  gold  minM  obviously 
operates  in  exactly  the  reverse  manna. 

Secondly,  if  there  be  an  increase  in  the  consumption 
of  gold  —  as  throuc^  loim  diaage  ci  fnhkm  —  it  may  be 
represented  by  an  increase  in  the  nimiber  or  size  of  the  out- 
lets of  Gy  The  result  will  be  i  draining  out  of  the  bullion 
reservoir,  and  consequently  a  decreased  amount  in  the 
cumacy  reservoir;  hence  an  increase  hi  the  purchasing 
power  of  gold,  which  increase  will  be  checked  finally  by  an 
increase  in  the  output  of  the  mines  as  well  as  by  a  decrease 
m  consumption.  When  the  increased  production  and  the 
decreased  consumption  beoMne  equal,  eqtdHbrfami  wiB 
again  be  reached.  ^ 

If  the  mints  are  closed,  that  is,  if  the  connection  be- 
tween the  bullion  reservoir  and  the  currency  reservoir  It 
dosed  by  a  vahre  so  that  gdd  cannot  flow  from  the  to- 
mer  to  the  latter  (although  it  can  flow  in  the  reverse 
direction),  then  the  purchasing  power  of  the  gold  as  money 
may  become  greater  than  its  value  as  bullion.  Any  in- 
crease in  the  production  of  gold  will  then  tend  only  to  fill 
the  bullion  reservoir  and  decrease  the  distance  of  the  sur- 
fac*  from  the  line  00,  i.e.,  lower  the  value  of  gold  bullion. 
Th  surface  of  the  liquid  in  the  money  reservoir  will  not  be 
brought  nearer  00.  It  may  even  by  gradual  loss  be  lowered 
farther  away.  In  other  words,  the  purchasing  power  of 
money  will  by  such  a  circumstance  be  made  entirely  inde- 
pendent of  the  value  of  the  bullion  out  of  which  it  was  first 
made. 

We  have  now  discussed  all  but  one  of  the  outnde  influences 
vpon  the  equation  of  exchange.  That  erne  is  the  character 


my  of  mon  y  and  dcfxjsitp    TWs  m  mtr^  W 
diK:ussion  m  the  following  chapter. 

tJ^'H^m^u'  ?  ^  "ote^orthy  th.t  aliuost  al!  of  the 
fafluenm  which  at  the  present  time  actually  ifft  <  t  dth«^ 
'  e  quant  tv  .r  the  veloritiW  i  ^ft'tatlier 

-die  pn  io.nir^,;^'n:,t^--»*^  b.« 

irfluences  d.scussed     ,  this  and  the  pn  cX,  ^ 

t«hnfc»|  knowledge  and  invention,  wh^^^ 
tion  of  exchange  by  incwMag  tri.  1e.        far  as  th^ 
increase  trade,  the  tenden  yTfu  d.  rease  r    i    but t 
far  as  they  develop  metr    rgy        ,^77  ^J-? 

the  production  a.     tSr    .    u.      ,  l^,^^ 
metals,  tliey  t«d  to  j^.    ^       .  tley 

Uie  transparta&m  an.   circuktbn  of  »,  ey  nnil^^ 

^  to  fte  developmen;  of  t    art  of  F        .  th  v  like 
wi«e  tend  to  iac««e  prices  ooth  b.       ea    g  dep^t 

Uon  both  of  r  ,„ey  .nd  .leposit.  ^  th^d 

aMnw-  )  aceaei«jT  g  arc  ation. 


CHAPTER  Xm 


OPEKAT'  ^N  or  MONETAAY  SYSTKMi 

1 1.  ClfUhiM'i  Uw 

TxuB  f ar  we  hftve  eimgl^red  the  ii^uencet  ttftt  dtrtermliw 

the  purchasing  power  money  when  the  money  in  cir- 
culation is  all  uf  one  kind.  The  illustration  given  in  the 
orevious  chapt^  shows  how  the  money  mechanism  qperatet 
«faea  a  lin^  metal  k  wed.  Wt  have  now  to  cooddar  tha 
BMoMary  interna  in  wUA  taro  or  won  k&ids  of  nonqr 
at  •  used. 

Qm  of  the  first  difficulties  in  the  early  history  ol  mon^ 
«  that  of  keq)ing  two  or  more  metab  in  drculathm  at 
me  time.  Tb<  monetary  unit  in  one  of  the  two  would 
cheaper  than  in  the  other,  and  the  cheaper  would 

(ix      iUt  the  dearer. 

To  this  tendency  has  been  given  the  name  of  Greiham'a 
Law"  in  honor  (rather  undeservedly)  of  Sir  Thomas 
Gresham,  a  financial  adviser  of  Queen  Elizabeth  of  Eng- 
land. He  called  attention  to  the  tendency  in  the  middle 
of  the  »xteenth  century,  althou^  it  is  now  luMwn  that 
many  others  had  anticipated  him.  In  fact,  the  law  seems 
to  have  been  recognized  among  the  ancient  Gredca.  It  is 
mentioned  in  the  "  Frogs  "  of  Aristophane"  •  - 

"  For  your  old  and  standard  i»ccet,  valued  and 
Here  uiMnig  the  Gredan  nations  and  in  an  '^^ 
Recognized  in  every  realm  for  trusty  staroi 
Are  rejected  and  abandoned  for  tlie  traih  <a  . 
For  a  vile,  adulterate  issue,  di  u— >,  emmtm^ 
Which  the  traffic  a<  the  Otjr  paHts  camm 

MS 


a«   «^NTAKY  PMNOPLES  Of  wxaioma  rQu..aii 

Gresham's  Law  is  ord'narflv  utMfmA  s«  *i.  * 

money  to  be  withdrawn  a^^^ 
What  then  b^^L  ol^l^  iMd-nWi.. 


9ac  •]       onntATioii  or  momsta&y  svBizm  aaj 

cause,  where  foreign  trade  is  involved,  it  is  the  foreigner 
receiving  the  money,  rather  th^A  otirsdves  giving  it, 
who  dictates  wiuit  kind  of  money  shall  be  accepted.  He 
will  take  only  the  best,  because  our  kgal-tendcr  laws  do 

not  bind  him. 

Until  "  milling  "  the  edges  of  coins  (making  the  edges 
findy  corrugated  so  that  they  cannot  be  filed  or  otherwise 
rubbed  off  without  detecting)  was  invented,  and  a  "  limit 
of  tolerance  "  ot  the  mint  (the  deviation  from  the  stand- 
ard weight  beyond  which  the  coin  is  rendered  unacceptable 
in  law  as  legal  tender)  was  adq>ted,  much  embarrass- 
ment was  felt  in  commerce  from  the  fact  that  the  clipping 
and  debasing  of  coin  was  a  common  practice.  Nowadays, 
however,  any  coin  which  has  been  so  "  sweated "  or 
dipped  as  to  reduce  its  wi^t  appiedaUy  ceases  to  be 
legal  tender,  and,  being  commonly  rejected  by  those  to 
whom  it  is  offered,  ceases  to  be  money.  Within  the  cus- 
tomary or  legal  limits  of  tolerance,  however,  —  that  is,  as 
kmg  as  the  dieaper  money  ooDt&nies  to  be  hiqb^,  — ft 
will  tend  to  drive  out  the  dearer. 

Gresham's  Law  applies  not  only  to  two  rival  moneys  of 
the  same  metal ;  it  applies  to  all  moneys  that  circulate  con- 
cumiitly. 

The  oibvioas  effect  of  Gfeaham's  Lair  it  to  dtaeaie  tbt 

purchasing  power  of  money  at  every  opportunity.  The 
history  of  the  world's  currendes  is  largdy  a  record  of  money 
debasements,  often  at  the  behest  of  the  sovereign.  Our 
diief  purpose  now,  in  oaauSMog  QnA»m*%  Law,  it  to  far> 
mulate  mora  tiSfy  tiie  caiues  determiaiiig  the  purchasing 
power  of  money  under  monetary  systems  subject  to  the 
q;>eration  of  Gresham's  Law.  The  first  plication  is  to 
"hhnftamim."  Under  biiii«talhm,goimiiflM&tt«p«t^ 
sB&itt  to  litt  fnt  oofaMise  of  two  bibIbIi  {ttMufl^  fold  tad 


»M  'OMtntn  rumnu  at  tootnma  tCM^xm 

•Over)  «t  1  £xed  coinage  ratio,  and  make  both  sort.  „i 
com  unlmiited  legal  tender  at  th^t  Fatio^^UBder  tM. 

r^'^eT^  f^"'  SOW  orTSv^ 

^T^^et??.  Sf^^at  -^-^ 

P^^^^nfy^1^.\^,^'t'  ^  I-'chasing 
fuUvtheinflnPnr-T  '       ^         to  understand 

fem         °5j»o»fy.  we  must  first  understand  its  me^ 

and  silver  dXrs  drcS  ^  ^T^"^^^  ^  '^^^ 
This  denial  is  on  ^  'V^'  *V  ^""^ 

cheaoer^fad  ^'^'^^  s  Law  by  which  the 

metal  wiM  drive  out  the  dearer.   Our  first  task 
fe  to  show,  quite  irrespectr/e  of  its  desirability  XtW 
metalhsm  can  and  does  "  work  "  .,n^«l^  ^  *' 

stances,  but  not  underTtherT  Tn 
woric  akd  J.^  ^aer  otners.   To  make  d  ar  when  it  wffl 

greater  clearnST  ^  fa't^' 

iUustration.  «»caim,  in  tenns  of  a  mechanical 

United  Stat«  bTthe  "l^f    ?     P"?^  " 
^  .av«.  i,  p'i;  t  exa'SytrLS'LS  M 
Ixitoy  opened  to  its  free  coinage  also  "h* 

uve  value  of  gold  ana  JSlfX^^^t 

JS?LlLt"r/^go'S"d2i"'S^^  silver 


8k.  9i       orsahon  og  iioiatxAmy  swxgna  tas 

opened.  If  41 2^  grains  of  silver  were  dearer  than  35.8 
grains  of  gold,  there  would  be  no  sQver  cdned  at  idD,  fox 
no  one  will  take  4x2^  grains  of  silver  to  be  coined  and  used 
as  a  dollar  of  money  when  he  can  get  more  than  a  gold 
dollar  for  it  by  selling  it  as  silver  biilli(m. 

But  if  (as  happens  to  be  the  case  to-day)  4^2^  grains  ci 
silver  are  cheaper  than  25.8  grains  of  gold,  every  owner  of 
silver  bullion  will  make  a  profit  by  taking  it  to  the  mint. 
In  this  way  he  can  get  a  silver  dollar  for  every  412^  grains 
of  silver  bullion,  while  in  the  silvar  bullion  market  he  can 
get  only,  let  us  say,  fifty  cents.  The  resiilt  will  be  a  wild 
scramble  among  all  owners  of  silver  bullion  to  get  it  coined, 
in  order  to  transform  each  412^  grains  of  it  into  a  full- 
fledged  dollar  instead  of  the  fifty  cents  whkii  previously 
was  all  they  could  get  for  it.  It  b  true  that  the  new 
silver  dollar  may  not  be  worth  as  much  in  purchasing 
power  as  a  gold  dollar  ;  but,  being  legal  tender,  it  will 
have  just  as  great  debt-paying  power. 

illiere  can  be  no  doubt,  then,  that  sflver,  being  cheaper 
than  gold,  will  be  taken  to  the  mint  as  soon  as  the  bunetallic 
law  takes  effect  The  question  now  is:  What  will  be  the 
result?   To  this  question  the  answer  is  briefly  as  foOows:— 

I.  The  first  effect  (as  has  been  emphasized  by  "  mono- 
metallists  ")  will  be  the  operation  of  Gresham's  Law,  by 
which  the  cheap  silver  dollars  will  tend  to  expel  the  dear 
gold  dollars  from  circulation. 

n.  Bttt  (as  emphasized  by  "  bunetalHBts ")  this  very 
operation  of  Gresham's  Law  tends  to  reduce  the  disparity 
between  the  values  of  the  gold  and  sQver  dollars.  Owing 
to  the  eagerness  of  dd>tors  to  use  silver  instead  of  goM  hi 
payii^  thdr  ddbts,  the  viliie  <^  siv«r  is  increased  and 
that  of  gold  decreased.  This  mutual  approach  of  the  values 
of  gold  and  silver  dollars  may  result  in  making  them  equal 

m.  But  (aspdnted  out  by  the  "  monometallists  ")  the 
next  nsnlt  vBl  b«  a  giMt  sttmohis  to  the  mining  of  t&vet 
■iidftgieatdiMonatHBWttetlitaMigflliBUL  Cobp 


M6     EI^TARY  PWNCIPIW  OF  WOMOIOCi  |QM».nB 

sequently,  sflver  wiU  gradually  become  ««r-  «i   *•*  ,  . 
the«5fore  cheaper  aeaiTanrfarS?^        Plentiful,  and 
dealer  --o^I.        ^    '    °        Scarcer,  and  therefore 
XTgiJd       ^^"^^^^"'^y' silver  wai  ag«n 
IV-  But  (as  insisted  by  "bfan«^liw.»\  • 

thestock  of  gold  are  self-limiting:  for  the 
Prodoction  of  sflver  will  be  check^'by  fac^seH^, 
production,  and  consumption  wffl  tenH  to       *  , 

'te^^slT^      opposSnVlLer  a^7S^Jl'~- 
TiVe  shaU  consider  these  results  in  their  ofder 

§  3-  When  Bimetallism  Fails 

ine  Wh     .l"'?  bimetallism  thus  faOs  of  its  obl^r^eep- 
nas  Deen  taken  away  a  great  mass  <rf  iBver  <U  tlx, 

g*l  biUto  more  abundant  and  cheapi' fa  its^S^I 
l»w«r  <m»  other  things   Hie  lewlt  i,  thM,  UwJ^ 


SK.SI 


ofBBAimi  o»  muRMnr  mzms 


law  has  failed  to  raise  412^  grains  of  silver  from  the  equhrnr- 
knt  of  half  a  ddlar  of  gold  to  the  equivalent  of  a  whole 

dollar  of  gold,  it  may  at  any  rate  raise  it  a  little. 

These  effects  can  be  more  exact'y  shown  by  means  of 
the  mechanical  illustration  of  the  last  chapter  carried  a  Utde 
further.  In  thb  the  amount  of  gold  bullion  is  represented 
by  the  omtents  of  reservoir  (Figs.  14,  15)-  Here,  as 
before,  we  represent  the  purchasing  power  or  value  of 
gold  by  the  distance  of  the  liquid  level  below  the  aero  levd, 
00.  In  the  last  chapter,  our  figure  represented  only  one 
metal,  gold,  and  rqpreaented  that  metal  in  two  reservoirs 
—  the  bullion  reservoir  and  the  coin  reservoir.  We  shall 
now,  one  step  at  a  time,  elaborate  that  figure.  First  we 
add  a  reservoir  for  silver  bulfion  (5»).  This  reservoir 
may  be  used  to  show  the  relation  between  the  value  or 
purchasing  power  of  silver  and  its  quantity  considered  as 
bullion. 

Here,  then,  are  three  reservoirs.  At  first  (Fig.  14*)  the 
iiWer  reservoir  is  entirely  isolated.  For  the  present,  let  us 
suppose  that  the  middle  one,  which  contains  money,  is  filled 
with  gold  money  only  (Figs.  14a,  iS^).  no  sUver  being  yet 
used  as  money.  In  other  wwds,  the  monetary  system  is 
the  «*wM»  as  that  discussed  in  the  last  chapter.  The  only 
change  here  introduced  is  to  add  to  the  picture  another 
reservoir  (S^),  entirely  detached,  showing  the  quantity  and 
value  of  silver  bullion. 

We  next  suppose  a  p^  opoied  at  the  right,  connecting 
5j  with  the  money  reservoir ;  that  is,  we  introduce  bimetal- 
lism. These  new  conditions  are  represented  in  Figure  146, 
where  a  pipe  gives  silver  an  cntrmce  into  tte  mcmcy  «r 
central  reservoir.  Thus  the  a  part  of  the  figure  represents 
conditions  before  the  mints  are  opened  to  silver.  The  b  part 
represents  conditions  after  they  have  been  opoied.   

The  liquids  representing  gdd  and  rflv»  mooey  are  wept^ 
rated  by  a  movable  fifan/.  in  Figure  X4«  this  fihn  is  at  the 
extieiae  tight;  iB  Figan  X4»,  at  the  estniiw  kit. 


"in  reservoir:  berajs!  wow*,  and  the 

■oU  «  ^  1 '^presents  that  quutity 

•»  «  *  A«  which  constitutes  a  mit  of 


Flo.  14. 


Sl^lThS^  physically  larger  than  a  goM  doll., 
righi  siderf  the  fiSr;  <'™P  »f  liquid  on  the 

»«l»««ti  a  dollar  of  gold  (,5.8  grains).  * 


sk.31      omja«m  or  MOKBiAn  nxnm  aw9 

In  the  figure  the  situation  represented  is  such  that  tiw 
levd  of  th<^  sOver  bullion  in  the  right  reservoir  is  above  the 
level  (  .  other  two  reservoirs,  which  are  filled  with  gold; 
that  ii  "ilver  bullion  is  so  abundant  and  cheap  as  to  be 
ready  to  iww  into  the  money  reservoir  as  soon  as  the  ndnt  or 
C(»necthig  jMpe  is  opened.  Were  this  not  the  case  (that  is, 
if  the  silver  level  in  the  right  reservoir  were  below  the  gold 
level  in  the  other  two  reservoirs),  it  is  evident  that  the 


As.  ij. 


Statute  introducing  bimetallism  would  be  inoperative ;  the 
silver  bullion  would  not,  as  it  were,  flow  uphill  into  the  money 
reservoir.  But  if ,  aa  ia  lepieseatsd  in  Rgoie  m«>  silver 
level  is  the  idf^,  tibeo,  as  soon  as  the  mints  are  opened  to 
nhrer  (that  is,  aa  aooa  aa  the  connecting       is  imertwO, 


It  will  continue  todisSaa^Ml  i^'"'  '^^  ^P*a<*«old. 

«oId  (that  is.  ^  l^^^iJ^J'^y^'K^^P^^ 

liquid  is  aboie  that  of         iJ^^  ^  ^  inflowing  sUver 

Se  gold  m^ey^^^'St'''''^^  '^^^ 

(that  is,  p^^^t^X  left  ,  'r^^ 

market).  "irougn  the  left  tube  into  the  buUion 

5  4.  When  BimetdUni  ffwrcmdi 

«i»t»,  to  ^^'Jtl  ^™«»t«i  in  Figure  ,4,  tlw, 

the  silver  anfgStAbSrlS^!,"^''^  "^"^ 
saver  bullion.  ^  ^        "'**»«ly  la>«e  amount  of 

fifty  cents  in  terms  ol^ra^^'^'^»'''>'^<«>'y 
"«tfc  Under  tW  r^nl?'  '  f""^  '">"1>  ninety-iiw 
"in^  <n,»^^r  '*'.^i'«'«"ion  of  tte  f!^ 
-oth.a.theoXtTLTS^J??"^'"^  »  dollar 
It  would  stiU  b^e  tt^^r^'^'^^'  <"  nearly  par. 

of  five  cent,  on  each  « j4  ™?    ?!    •  ""^  » 
much  such  coinan>1iiL  A^l"  n"'^''  "<« 

to  get  Se  n^^  5*»  «ilvw  to  par.  The 
•""fr  «lue,  whilT tl^*^;^"'^,™^^  tarf  to  rri, 
•"W  tend  to  to«  S,*  rLfr  °"  ^  **" 


Sk.41       opbsation  aw  monxtaky  systems  a^x 

than  19  to  par  in  tennt  of  gold,  Gmham's  Law  would,  of 
course,  cease  to  operate,  and  we  should  have  both  sUver 
and  gold  dollars  circulating  on  equal  terms,  side  by  side. 

TUa  reaiilt  is  pictured  in  FIguie  is-  The  i^per  part 
(Ftg.  zsa)  shows  the  situation  before  the  introduction 
of  free  coinage  of  silver,  and  the  lower  part  (Fig.  156) 
shows  what  will  be  the  result  if  silver  has  been  allowed  to 
flow  into  circulation.  In  this  case  the  fihn/has  been  pushed 
only  part  way  to  the  left,  —  to  such  a  point  as  to  bring  the 
silver  and  gold  levels  into  coincidence.  As  the  film  has 
been  swept  to  the  left,  and  more  room  has  thus  been  made 
for  silver,  the  silver  levd  has  fallen,  while  as  the  ibn  has 
crowded  out  gold,  the  gold  level  has  risen  and  the  two  levels 
have  come  into  coincidence  on  the  line  mm.  In  other  words, 
the  premium  on  gold  bullion  has  disappeared,  and  bimet- 
allism has,  for  the  time  being  at  least,  sncceected. 

While  such  an  equattty  in  the  val«e  at  gold  and  silver  dol> 
lars  continues,  neither  completely  expels  the  other,  although 
both  are  freely  coined.  If  the  levels  of  the  two  metals  on 
opposite  sides  of  the  fihn  /  should,  for  a  moment,  <ttier 
sfiglitly,  the  <Merence  would  be  automatically  corrected,  for 
the  cheaper  metal  having  the  higher  level  would  simply  crowd 
against  the  dearer  metal  having  the  lower  level  and  the 
sq>arating  fihn/  would  need  to  diift  only  a  little  before  tike 
two  levds  would  again  coincide.  For  these  reasons,  no  mat- 
ter which  of  the  metals  tends  from  time  to  time  to  become 
more  plentiful  and  cheaper,  and,  therdore,  to  e:^  the  other, 
the  only  result  would  be  a  slight  shifting  of  the  film.  This 
win  move  from  fig^t  to  left  or  left  to  right,  as  the  case  may  b^ 
but  as  long  as  it  does  >.  move  completely  to  the  right  or 
the  left  limit,  bimetallism  will  continue  to  be  successful. 
The  fihn  being  movable  (that  is,  gold  and  silver  bstef 
mutually  replaceable  as  mcmy),  the  three  letervoto  act  as 
one  and  keep  a  common  level  for  all  three. 

We  see,  then,  that  those  are  wrong  who  maintain  that 
Gresham's  Law  always  results  in  annplete  prpulsinn  from 


"f  be  pushed  ^*  ^ 

between  the  two  BqukbrtlXn^;^  <ie  difference  of  level 
iUHnut.  WWch^rS^t^S^^^trj^ 

™4«^4r?sn,«  1^7  i?  ^  of  the  four  cases 
liquids  fa  ihe%i™Wth.Tk  Si'^'^'  »^  few  of  the 
liquids  contained  fa  Se  S^Llf*  '««"  "Uch  the 

co^u^tfc.  -nX'tiTweTSyri 

exceeds  the  total  caoacitv  nTZl  T  ^ 
money  reserved ftk'i^  »f  * ^^''^^  *°       into  the 
The  case  rq)resented  in  Fimire  rr  ic 

did  occur  fa  the  si^alST"  V""-'  """^y 


Sac.  si  v.l>|]UTXON  OF  MONSTAXY  SYSTEMS  2^ 

f  5.  Chang M  to  BrodacHwi  md  Cmmmf^ 

m.  Thus  far  in  our  discussion  we  have  taken  no  account 
of  the  production  and  consiunption  of  the  pndout  meCab. 
We  have  taken  acoomtt  only  of  the  distribution  of  the 
existing  stocks  of  these  metals  as  between  money  in  circula- 
tion and  gold  and  silver  bullion.  As  has  already  been  hinted, 
as  soon  as  the  first  effects  of  free  coinage  have  been  Mt  and 
the  eibting  available  stock  of  silver  has  been  coined,  there 
will  be  at  once  a  great  stimulus  to  silver  mining  and  dis- 
couragement to  gold  mining.  If,  for  instance,  as  above  8i^>- 
posed,  before  the  introduction  of  bimetallism,  the  vahie  of 
41  al  grains  of  dvar  had  been  nbety-five  cents  in  gold,  but,  as 
a  consequence  of  the  free  coinage  of  silver,  its  value  has  im- 
proved to  a  dollar,  it  is  evident  that  producers  of  silver  wiU, 
in  consequence  of  this  rise  in  price  of  their  product,  be 
encouraged  to  mine  a  larger  product  than  before  the  intro- 
duction of  bimetallism.  Through  its  new  monetary  use 
their  market  for  silver  has  been  greatly  increased.  At  the 
same  time  the  market  for  gold  will  have  been  decreased  and 
itspcoductioiidisooaiaged.  While  thevalue  of  silver  in  tenas 
of  gold  has  increased,  the  value  of  gold  in  terms  of  silver 
has  decreased,  or,  what  is  more  to  the  point,  while  the  value 
of  silver  in  terms  of  goods  in  general  has  increased,  the  value 
of  gdd  in  terna  ci  goods  in  genoral  has  decreased.  We 
have  ah«ady  seen  (in  Chapter  XII,  §  4)  that  this  decrease  in 
the  value  of  gold  will  discourage  its  production  just  as  the 
increase  in  the  value  of  silver  will  encourage  its  production. 

then,  the  ou^t  ci  diver  i^Kreaaes  and  that  of 
gokA  (tocreases,  there  will  be  a  still  further  expulsion  of  gold 
by  sflver.  In  the  mechanical  illustration  some  of  the  silver 
inlets  at  the  right,  formerly  unused  (below  the  liquid  surface) 
wiD  have  been  tmomfed  and  wfil  pour  ^efr  Mnams  into 
the  reservoir  5»,  while  some  gold  inlets  at  tiie  left  (oxmufy 
open  will  be  submerged  and  cease  their  flow.  CaoKqamify, 
the  fihn  will  be  shifted  toward  the  left. 


•34   

c«a»d producUon  0/ 3a»nr2iCh^'L,J*' 
™^jj««ed  pnxiucUon  coma^^^I^'TjE*' 
"••»«*>•>  of  aflver  on  the  oti,.,r  J  ^ht  con- 

Unue  to  operate  at «  ni^fi^         ^'^  produced  via  cob- 
duction  foU:^;".1S^,''^-f''» 
l"""!*  of  stock  may  lead  to  aTZ^ 

such  disturbT'oahfs.SSS^S^^ 

Plet.  or  ,0,  de^XL*tL«  ^"'fZ'"' 

Consequently,  the  fito,  „m^!  "mmuUmca. 
W« «  gold  or  ^Z  Zi  to^rom      V"      -igit  or  the 

tu.way,ior«^^iL^^ra:r^",:'*r,!i'"- 

remain  in  successful  nrJl«™  /  ,  ""melallism  may 
^din^^ran.  ,rte?s^;.^X""^l'T^'' 

sometimes  gold  pardallT di^^^.  •     ^.^P^^^cmg  gold  and 

«d  of  the  ^l^stcL^  fct: 


an  4       onuunoM  ot  womjox  mxnii  ajs 


odMK  For  ft  kK^  tine  the  film  shifted  beck  and  forth 
without  reaching  its  limit  on  either  side.  But  such  a  fate 
is  in  the  end  almost  inevitable.  This  is  what  happened  in 
France  in  1873. 

BfanetaUism  is  to-day  ft  subject  of  historical  intmit  «ly. 

It  is  no  longer  {wactked;  but  its  former  prevalence  has 
left  behind  it  in  many  countries,  including  France  and  the 
United  States,  a  monetary  system  which  is  sometimes 
called  the  "  limping  "  standaid.  Such  a  system  comes  about 
when,  in  a  system  of  bimetallism,  before  either  metal  can 
wholly  expel  the  other,  the  mint  is  closed  to  the  cheaper  of 
them,  but  the  coinage  that  has  been  accomplished  up  to 
date  is  not  recalled.  Suppose  silver  to  be  the  metal 
oduded  —  as  in  France  and  the  United  States.  Any 
moaty  ol  that  metal  ftlready  ooined  and  in  drcuUtioii  is 


kept  in  circulation  at  par  with  gold.  This  parity  may 
continue  even  if  limiied  additional  amounts  of  rilver  be 
coined  faem  tfane  to  thne.  There  will  then  result  a  differw 
ffncff  in  vUue  between  silver  bullion  and  silver  coin,  the 
ffllver  coin  being  overvalued.  This  situation  is  rq;>re8ented 
in  Figure  16.  Here  the  pipe  connection  between  the  mooQr 


«36    «^«v™»c«„„«^   ^  ^ 

reservoir  and  the  aOver  bulBQii  rmunn  •  u  . 

were,  cut  oflF,  or,  let  uTsaVTn^^''  ^         as  it 

««>^  r^ervoir,  but  notTe  rt^et^tSi  I'l"**  ^ 
pi^vent  the  melting  down  of  •  ^^"^  <^ 

New^y  mined  sOv^-c^  ^^wtlL^"^  "^"^  ^*°>- 

power 

the^v^^^uX"^^ 

the  gold,  but  also  7f  tiiecZZ^^i  ^^^e,  not  only  of 
valued  saver.  If  more  gold  X^a^^  dmdating  over- 
reservoir,  ft  would  raiL  S  T  ""'^  ^oney 

level  ever  become  hiS^tS^  JTf'''^  Should  thfa 

reservoir,  silver  lom  lTfr^ '^"^  °'  ^"^^^ 
the  bullion  reservoir   for  ThiT  ^  "^""^^  '^^<>ir  into 
melting)  i.  ,tffl^    So  j      T  (^-^^ 
level  is  below  the  Sver  levd  ^'  ^^''T'  ^ 
silver  is  worth  more  th^Srot;'J°*u"«  ^  ^^^n^d 
of  sUver  in  either  dirSSn    ^^T"*,'        ^  be  no  flow 
the  inflow  of  save?  S  Sie  1^  P«^t. 
by  melting  prevent;  its  outfloT         '^^^  ^ 

Will  ^U^iTL^^^',  "^./^J^  the  coined  sUver 

the  coined  value  of  iSa^-  the  case  of  any  money 

constituent  "^e"tl^^  ^« 

money.   So  long  as  it  h^  thTn^. '  «^  Paper 

money -generd  acc^u^iht  ttZT%''''^^ 
hmited  in  quantity,  itk^^Zn  -  and  is 

ofits  legal  equivai^'t^"^^  "5^^^  ^  to  that 
indefinitely,  it  will  aroT,  n  T  quantity  increases 
«tlrely  ^  tSe^on^l^^^^  T  ^  ^^^^^ 
»mder  bimetallism  if  dL,^°  ^         would  do 

Jikewise  credit  "  Z^X^jf«^^^^ 
<J^ts  would  have  tWs  eLt        .i,^*  ^^'^  bank 


onuamH  ot  whoxaix  smwrn 


as  money,  and  cause  more  of  it  to  go  into  the  arts  or  to 
othor  countries. 

So  long  as  the  quantity  of  silver  or  other  token  money, 
e.g.,  paper  money,  is  too  small  to  displace  gold  completely, 
gold  will  continue  in  drcula  'on.    The  value  of  other 
money  in  this  case  cannot  USk  below  that  of  goUL  For  if  it 
ahouhl,  it  would  by  Gresham's  Law  displace  gold,  which  we 
have  supposed  it  is  not  of  sufficient  quantity  to  do.  The 
parity  between  silver  coin  and  gold  coin,  under  this  "  limp- 
faig  "  standhod  is,  therefore,  not  necessarily  dependent  on  any 
redeemability  in  gold,  but  may  result  merely  from  limita- 
tion in  the  amount  of  silver  coin.   Such  limitation  is  usually 
sufficient  to  maintain  parity,  despite  irredeemability.  This 
is  not  always  true,  however;  lor  if  for  any  reason  (iU(^  as 
ita  novelty  and  strangeness  or  rumors  of  further  inflation) 
the  people  should  not  have  confidence  in  some  form  of 
irredeemable  paper  or  token  money,  even  though  it  were 
not  overissued,  it  would  depradate  and  be  neariy  as  dMi^ 
in  money  form  as  it  is  in  the  raw  state.  It  mi^t  even  be 
so  completely  rejected  that  it  would  cease  to  circulate  and 
cease  to  be  money.  A  man  is  willing  to  accept  money  at  its 
face  value  so  long  as  lie  has  0(mfidence  tliat  every  me  dae  ia 
ready  to  do  the  same.  But  it  is  possible,  for  instance,  for  a 
mere  fear  of  overissue  to  destroy  this  confidence.  The  payee, 
who  under  ordinary  drciunstances  submits  patiently  to 
whatever  money  is  a  customary  or  legal  teiMler,  may  then 
take  a  hutd  and  insist  on  "  contracting  out "  of  the  offend- 
ing standard.   That  is,  he  may  insist  on  making  all  his 
future  contracts  in  terms  of  the  better  metal  —  goW,  for 
instance  —  and  thus  contribute  to  the  further  dow^bfi  in 
value  of  the  depradatad  li^>er. 

Irredeemable  paper  money,  then,  like  our  irredeemable 
alver  dollars,  may  circulate  at  par  with  other  money  if 
limited  in  quantity  and  not  too  unpopular.  If  it  b  gra^ 
tSfy  hKreased  uhobI,  aodt  fanedeemabte  raaoMf  ma^ 
espd  afi  BtttalBc  moMy  and  be  left  u  uw&pulsd  peasaa- 


f«t  alo«  causes  businS  dK^'Si;'"^' 
contracts  and  entemrises    iZI^  *«»«nges  long-time 
.almost  invariably  p^^  .  ^ITk """V  ta. 
it.  While,  the  Jore  ^ri-lS.  -'^"'"'^'"P'<>^ 

h  pracUcaUy  a  wise  precaution  '^"^  » 

monetary  system     oTZ        ?  "  °"  "satisfactory 

d.emable  in'2^doS^'^r,H"'™'.,'««*"'«  are  Z 
"AWMAteinn^  Th.  L^'*  '■""an  •«  aot 
in  the  fictSn  t^so.^'Ti?  °'      ^"^M""  «m*2 

ITie  truth  is  that  f ^  par  with  noId 

A  ^^^T^lr^l^l'^.^  -demptiorTsaT^ 

«oW  doUar.   ^ct  tha^  ^  T*'  "  than  a 

whfle  the  paper  L  tnL^^:  ^50^ 

avail  in  the  least  to  make  d^erJiT  -f  * 

worth  a  whole  dollar.   A  niS^  ^i^  ^  P»Per 

the  ceiling  cannot  hold  thVSl^  ^"^y  ^ 

lars  keepTi^^^tl^'^^^'-  7"^*^^"^'^^  ^^vHol! 
sufficient^•„^^:;,^,^^^  are  not 

^The  systeiTtrfi^X"^ 
the  United  States  =,n,j  "°P*°«,»t™aKr,  now  obtakung  in 

««^^V^between  complete  bimetallism  and  ^ 

*^ch  any  nvmber  of  diffmt 


SlC.6]  ORSATION  07  MONETARY  SYSIXMS  239 

kinds  of  money  may  be  simultaneously  kept  in  circulation. 
Most  modem  civilized  states  have  solved  the  problem  of 
ocmcurrent  circulation  by  using  gold  as  a  standard  and 
ifivcr,  aided,  sad  copper  chiefly  as  a  mhsiitiiiy  nxmey, 
iniled  fai  quantity,  with,  in  mast  cases,  limited  amounts 
of  paper  money,  the  latter  being  usually  redeemable.  The 
possible  variations  of  this  compoute  system  are  unlimited, 
li  die  XMteA  Stetes  at  pteaat  ipe  l»ve  a  tyilcm  wUA 
is  very  complicated,  consisting  d  gold  dollars  freely  coined, 
silver  dollars,  fractional  silver,  minor  coins  of  nickel  and  of 
capper,  United  Sitatea.  notes,  national  bank  notes,  gold  cer- 
tificsfeea  ani^iSver  ixxiMuittn,  "Ott  sjrstem  is  not  ndy  com- 
pGcated,  but  objectionable  in  many  of  its  features,  especially 
in  its  lack  of  elasticity,  which  characteristic  is  due  to  the 
fact  that  national  bank  notes  are  baaed  upon  the  inelastic 
national  debt  rather  tkm  upon  titt  dtaitk  general  tmm 


CHAPTER  XIV 

<»  mom 

f  I.  Qi9  "0*«  lUngs  Remain  Eqaai"? 
fc^A^JSKll?  V**'  Pf needing  six  chaptera  is  to  tct 

"Mer  «  currency,  on  its  velorkvTn^  groups 
tnwle.  These  mi^dr  eS^^^L^T  ^ 
connected  by  an  equa^ofSa^^JL^' ''^ 
MV  +  ii^L  2^  ^  exchange, 

to  be  themselv^^ects  ir^rJ*"^'  ^        ^e  found 
ou^-de Of  the  eTua^STnX^"  ^^'^g  entirely 
of  trade  will  be  mct^^^^^^J^ZL  volume 
;«^ciingly  decreased  by^he  ^SS.2l^"^f 
•»ts;  by  diversificaUon  of  bJus^^?*,*^.,  '"™^ 
^  eomwiidtttioii.  The  velodti^nZ  •    ,  ^^o^tatioa 
^ed.  and  th«efore  5e  X  £.2  ST^k""'?  ^ 

habit.;  by  the^e^)^,^^ft^,^P^ov. 

twasportatioi.   The  n,,.^,;!    r  *>y  rapid 

n^tST^ont  P.^^^;^^^       by  the  irl^i 
"--y  metal;  by^'^^S^^^ '^-^J^- 

otSSl^roTr?^^^^^^^ 


•Bd  by  the 


Sk.  i] 


CONCLUSIONS  ON  MONIY 


24Z 


use  of  book  credU.  The  levcfw  CMuet  piodnoe,  of  coane^ 

reverse  effects. 

Thus,  behind  the  three  gets  of  causes  which  alone  affect 
tlM  paxdiaaag  power  of  moa^,  we  find  over  a  doaen  ante- 
cedent causes.  If  we  chose  to  pursue  the  inquiry  to  stm 
remoter  stages,  the  number  of  causes  would  be  found  to 
increase  at  each  stage  in  much  the  same  way  as  the  number 
of  erne's  ancestm  inoeuei  wil^  ea^  cener^iaB  into  the 
past.  In  the  last  analysis  myriads  of  factors  play  upon  the 
purchasing  power  of  money ;  but  it  would  be  neither  feasible 
nor  profitable  to  catalogue  them.  The  value  of  oiir  analysis 
conibti  rather  in  sioqiyfyiiig  the  proUem  by  setting  forth 
dearly  the  three  proximate  causes  through  which  all  others 
whatsoever  must  operate.  At  the  close  of  our  study,  as  at 
the  beginning,  stands  forth  the  equation  of  exchange  as  the 
great  ^tenniiiuit<tf  the  purduuiiig  power  of  moBiy.  mik 
its  aid  we  see  tiu^  normally  the  quantity  of  deposit  currency 
varies  directly  with  the  quantity  of  money,  and  that  there- 
fore the  introduction  of  dqx)sit8  does  not  disturb  the  re- 
ktiooawefoimdtohfridtniefaelne.  Thatii,itiiitffltiiM 
that  (i)  prices  vary  directly  as  the  qoantity  of  moii^,  pro- 
vided the  volume  of  trade  and  the  velocities  of  circulation 
remain  imchanged;  (2)  that  prices  vary  directly  as  the 
velocities  ct  cttodetfan  (if  tlieae  vdocittes  vary  together), 
jMOvided  the  quantity  of  money  —  and  therefore  deposits 
—  and  the  volume  of  trade  remain  unchanged ;  and  (3)  that 
prices  vary  inversely  as  the  volume  of  trade,  provided  the 
quantity  of  money  mi  therefore  ^podtt  aikl  the  veloc- 
ities of  circulation  remain  unchanged. 

But  the  question  now  arises,  Can  the  factors  supposed 
to  "remain  unchanged"  in  these  three  cases  actually  remain 
«»diai^?  To  UtiB  que»tk»  the  auwer  is,  "Yei,  wMi 
(me  ezcsplioa."  A  dumge  m  the  vtAmne  ci  trade  per 
capita  seems  to  affect,  besides  prices,  the  vdiodties  of 
circulatbn,  so  that  these  velocities  cannot  "remain  un- 
^kutgtd."    At  a  given  price  level,  the  greater  the  per 


capita  trade,  the  more  wpklfa  tlie  iadbUwa  tim^ 
Statistics  seem  to  show  this  wnwwr. 

theoppositesidelflhee^^tiot^^^ 

and  apart  from  transiUon  oeriods  XTlt  •"^^*«» 

and  deposits,  (a)  thife  vrfftri*!-/  r  ?    ,  "^°"«y 

effects  on  prict       hTil  Se^iT^K  ^ 
proportions.    SimilarJv  a  rKorT^  " 

nuiy  temporary;  S'  lne7^d  J''"'!'^'  * 
trade.  wiUn.!  d»  » ^  ^  ?*P^^*'«  ^eU  as 
all  its  effecron  p^^<^  ^  but  wfll  al«  e^ 

Reproof  of  these  conchisions  consists  simply  in  tie  fert 
raw  nwwtigation  ftdk  to  show  anv  nth^  ^ 
the  factors  m  Ite     w  m»w  any  other  relations  among 

yi^ackhayektmmmJSmS!^       ejdu^jt  than  thoM 

,  MM  not  Decrease  ita  Velodt? 

It  cannot  be  Am,  far  inatance  that  ^  • 

transiuon  periods)  there  is  ^-Ti^TI^^^ 

in-gine^t^tf:^;:^-^-^^^^^^  -*i-t 
prices  need  not  ri^rL^SSL'*^"^^^^  ^"-^^''y- 
Ortthevelocity  of  circuladonrttT  S'wSLfffi^ 
^^i^riJ^r^  unacccnmtable  r^n,"^ 
ing  prSiseirllL^^SS;  1"^ 


Sac.  a] 


CONCLUSIONS  ON  MONEY 


H3 


convenient  amount  to  carry  in  order  that  it  shall  be  best 
adapted  to  meet  their  partioilar  expenditures.  If,  then, 
mimey  and  expenditure  are  mutually  adjusted  to  suit  the 
canvfadenes  of  Iht  pM^,  this  inq>lies  that  any  increase  in 
ths  Mwunts  carried  would  (|sr  s  givm  price  level)  be 
inconveniently  large. 

To  make  the  picture  definite,  let  us  suppose  that  the  aver* 
age  per  capita  mmmM  ci  money  in  actual  drculatioo  in  the 
United  States,  outside  of  the  United  States  Treasury  and 
the  banks,  is  about  $15,  and  that  some  mysterious  Santa 
Claus  suddenly  doubles  the  amount  in  the  possession  of 
ea^  ImMiiilaai.  Tlii  mmm  tiMt  the  avenge  ia^vidittl 
will  have  I30  wkm  bdem  he  had  $15.  Now,  statistics 
show  that  the  average  per  capita  amoimt  in  circulation 
changes  only  slightly  from  month  to  month.  While  the 
nmiml  mnmj  rwiirt  tr  wr  '-i"-*-^ -*  -"—-ny 
flutliU  because  of  his  aepea^tmes  and  receipts,  in  a  large 
group  of  people  the  average  amount  carried  by  the  several 
iadividuab  composing  the  group  will  fluctuate  but  little. 
V,  fte,  m  ham  «n  adfite  to  the  total  cfaodatka  is 
•tiddenly  made  as  to  put  fifteen  extra  dollars  per  capita  in 
the  hands  of  the  public,  the  first  thought  of  most  people  will 
be  how  to  get  rid  <tf  th»  aKoavenicnt  addition  to  the  money 
wmt^ueamj^  U they ilierii te facMmd to houA 
il  ii  liiiiiTlh^'  er  Mies  er  to  huiy  it  in  the  earth  or  to  dn^ 
k  fnto  the  sea,  it  would  have  no  tendency  to  raise  prices. 
lattMd,  however,  they  will  seek  to  make  some  use  of  it 
S^MT  by  expending  it  for  goo^  or  by  dqpcMitaig  it  ftibaidn. 
I^m  a  few  days  after  the  siq^MSSd  virftof  Seata  Claus,  the 
warptiaied  recipients  of  the  extra  money  will,  in  most  cases, 
have  disposed  of  it  in  one  oi  these  two  wajrs.  To  the  extoit 
that  they  dMpoee  of  it  ia  Ite  int  «ay — i»  paNisas  flf 
§lods~  it  is  evident  that  there  will  be  a  IwiHcgr  to 
IMlces,  for  the  stKlden  expenditure  of  $15  per  capita,  even 
hy  a  small  f  ractkm  <d  the  peogit  oi  tbt  Umted  &ates,  will 
meaa  a  phtaoiwl  nish  ipai  tfca  siwpa 


The  average  indhritfaial  doM  n^*        j  . 
more  than  I15  in  two  weekT^  tw  money 
or  about  |i<x,oooWr2;  a  dollar  a  day 

average  man  ahoSd  ^  to^^K^  "^^"^  the 
would  be  $3  per  day  p^caSiS^^t^  ^«  «8«lt 

make  $400  000  onoV^  *ioo,ooo^  «  day 

«te  of  cW^C'^i^^'  thVordinaJ 
would  asto^  the  sLnT"  1 1^?!^  ^'^'kness  in  trade 
^  their  prices;  othS  fa  1^  P^^^P^^  *<» 
^  be  entirely  depIeS^  ^  »«y  cues  their  «ik. 

only  require  a 

the  fluny  in  prices  wouW  /J  money  so  that 

^IJ^'^Z^'U^^^'^  temporary 
fo«8ettliatthe«ivwav{n      JfT°o"s;  for  we  must  not 

f  money  is  by'ttg^tt^^:^ 

i«  not  rid  of  it    IfthAl  T       ■*''''**^ye^se-  Sodetv 

dan.  hypoi^  wfal^^S'^X'Sn"^ 
mysteriously,  receive  ini^^onlh?^  ?  ""''^  ^^^^^^^^ 
customers,  they  wiU  now  S T^l  j^^^  ^^i^ 
»«T>lus  of  cash  and  in  th^ ^  ?^  embarrassed  with  a 
0*  it,  by  Purchas^  g^^,;^f 2r^;^^^  ««*«vor  to  get  rid 
it  in  banks.^o^^^^i^^»>fmess  or  by  depositing 
transferring  itl^r^^tj^^^  ^oneyl^ 
surplus,  the  surplus  in  t^TT     ■^"•body  else  having  a 

•™P^<»«h.   No  banker  wS^MK"*^?'«"°<'<>'«fc« 
each  «a        ,1.  wisnes  to  have  idle  r 


8K.4 


OONCLUnONS  ON  MQMIY 


crease  of  buaineas,  including  an  increaw  of  dqxMils.  We  have 
Men  that  this  tendency  results  ultimatdy  hi  preservhig  the 
rdative  amounts  of  the  three  magnitudes:  money  in  drcula^ 
tioo,  money  in  bonk  reicrvei,  and  dqKMits  based  <xi  these 
serves.  In  the  end,  then,  the  doabUng  of  society's  money  wfll 
mean  a  doubling  (i)  of  the  money  in  circulation,  (3)  of  the 
numey  in  banks,  and  (3)  of  the  deposits  based  on  this  money. 
Jn  a  short  tfane  it  will  also  mean  a  doubling  of  prices,  for  as 
long  as  fMkes  fail  to  be  double  what  they  there  will 
be  the  same  phenomenon  of  inconvenient  surpluses.  Indi- 
viduals, tradesmen,  bankers,  etc.,  will  be  trying  to  get  rid 
of  these  surpluses,  and  their  efforts  to  get  rid  of  them  must 
tend  to  raise  prices.  When,  however  i^icet  have  reaped 
double  their  original  level,  there  will  ^  no  longer  any  effort 
to  get  rid  of  surplus  cash ;  for  thert-  wi^l  be  no  surplus  cash. 
The  $30  per  capita  which  has  thus  been  created  will  no 
longer  seem  excessive,  in  view  of  the  iuX  that  pcicea  am 
double  what  they  formerly  were  and  that  the  persons  carry- 
ing this  money  will,  on  the  average,  find  their  wages  or 
incomes  doubled  likewise.  Thus,  if  formerly  the  average 
indhridual  was  accustmned  to  spend  $300  and  to  cany  m 
average  balance  of  I15,  he  will  now  spend  $600  and  cany 
an  average  1  ance  of  $30.  The  adjustment  of  the  I30  to 
$600  is  exactly  the  same  as  the  former  adjustment  of  the 
$15  to  $300.  In  dther  case  the  rehttKm  b  one  to  twenty, 
which  means  that  the  individual  turns  his  money  over,  on  the 
average,  twenty  times  a  year.  Thus,  in  the  end,  a  doubling 
of  the  quantity  of  money  does  not  expend  its  effect  in  d»> 
turbing  the  velodtyol  dfculatioii,  but  raising  the  general 
level  of  prices. 

It  is  worth  noting  that  the  imaginary  example  we  have 
given  represents,  except  m  its  details,  exactly  wliat  actually 
happens  wtei  new  gold  ii discovered.  Goldmineis  convert 
their  product  into  money,  sometimes  usirg  it  as  such  in  the 
form  of  nuggets  or  gold  dust  and  sometimes  taking  it  to  the 
mint  and  converting  it  into  coin.  They  find  themselves  m 


i46    'ummxt  wmanm  <»  mxmoma  fOu,.xn 

pott«Mon  of  b>g,  fuM  of  money  far  beyond  what  they  ntfd 
m  U0  BHit  eomint  amount  of  pocket  money.  If.  for 
instance,  one  of  these  men  has  just  raorfvwi  tei  the  ^fait 

a  thousand  dollars  in  gold,  he  is  abnost  sure  to  get  lid  ol 
t  as  speedily  as  possible,  either  by  spending 

iK^^if?^^*^**^-  I«  either  ci.  he  and 
the  hundreds  of  otlwa  who  a»  doing  the  lame  thin^  tend  to 
raise  prices  m  the  community  where  they  are  spending  their 

Z'^'.u^"^  ^''r    i  ""^^  on  the  bank, 

ai  wnicn  they  deposit  their  money. 

It  was  thus  that  prices  rose  in  the  mining  camps  of  Cali- 
fornia a  half  dozen  decades  ago  and  one  or  two  decades  ago 
m  Colorado  and  the  Klondike.  ITiis  local  rise  of  prices  then 
conmnnicated  itself  to  other  places;  for,  as  we  have  seen,  the 
price  level  mnot  in  one  locaHty  greatly  exceed  that  in  a 
neighboring  locahty  without  causing  an  export  of  money 

£  !fl*iSf^°f^>  '"oney  gradually  fin(b 

^  into  circulation  throughout  the  world,  raising  prices 
as  it  flo^  from  place  to  place,  the  piocesB  consisting  in 
aU  cases  of  the  effort  to  get  rid  of  an  inconvenient  surplus  and 
one  Which  <»nnot  be  permanently  got  rid  of  by  translenins 
ft  ftomliand  to  hand,  but  only  by  a  rise  of  prices. 

TWs  picture  of  the  manner  in  which  an  increase  of  money 
causes  a  rise  of  pnces  is  here  given  to  show  deariy  that  an 
mcrease  m  the  amount  of  money  (Af)  does  not  result  in  a 
n«edecwaaek  its  velocity  (K).  Its  velocity  depends,  not 
on  its  quantity,  but  on  the  factors  given  in  Chapter  XI, 
M  3»  4»  $• 

In  tibe  same  way  it  might  be  shown  that  an  increase  in  the 
quantity  of  money  will  not  affect  the  velocity  (KO  of  drcu- 
lauon  of  bank  deposits  nor  the  vohmie  of  trade  (the  O's). 
It  will  merely  affect  the  vohmie  ol  deposits  (JO  and  the 
level  of  prices  (P).  ^    / -«*  uw 

(^^^^  ^  ^  ^^^^^e*  P''«vent  other  causes 

from  at  the  same  tane  affecting  It,  V,  K  and  the  Q's,  and 

thus  aggrmvatBig  or  neutialiafag  the  effect  of  Jf  on  the  ^s. 


8k.i) 


U7 


But  these  are  not  the  effects  of  If .  So  far  as  if  6y  itsdf  is 
concerned,  its  effect  is  only  on  it  and  the  p'»  and  is  propor- 
tional  to  its  quaiitity.  Tht  importanrt  Md  ivtlity  of  tUt 
proportion  U  not  diminished  in  tlw  kttt  by  the  fact  that 
these  other  causes  do  not,  as  a  matter  of  fact,  remain  qui- 
escent and  allow  the  effect  on  the  p'»  of  an  increase  in  if 
to  be  Men  tepanldy  from  dfoett  of  other  caum.  Hie 
effeete  of  changes  in  M  are  blended  with  the  ^ects  of 
changes  in  the  other  factors  in  the  equation  of  exchange, 
just  as  the  effects  of  gravity  upon  a  falling  body  are 
btended  with  the  effects  of  the  reibtance  of  the  etmoephen. 

Our  main  conclusion,  then,  is  that  we  find  nothing  to 
interfere  with  the  truth  of  the  quantity  theory :  that  varia- 
tions in  money  (if)  produce,  normally,  proportional  changes 
in  i»kes. 

We  have  now  finished  with  the  principles  determining 
the  purchasing  power  of  money.  By  the  aid  of  these  prin- 
ciples the  student  should  be  able  to  avoid  hereafter  most 
of  the  fallades  and  pitfaBs  wfakh  bewt  tlw  sdbject  He 
wQl  find  it  a  useful  exercise  to  tnra  hmck  to  Chapter  I  and 
test  himself  by  analyzing  as  many  as  he  can  of  the  money 
fallacies  there  stated.  The  others  we  hope  to  clear  up  in 
later  dupten. 

f  3.  Aa  lades  Kutar  of  Mm 

We  have  been  studying  the  catnes  detomining  the  puN 
chasiiig  power  ci  money,  or  its  reciprocal,  the  level  of  prices. 
Hitherto  we  have  not  defined  exactly  what  a  "  general  level" 
of  prices  may  mean.  There  was  no  need  of  such  a  definition 
so  long  as  we  assumed,  as  we  have  usually  doie  hitlierto, 
that  aH  piioea  move  in  perfect  unison.  But  practically, 
prices  never  do  move  in  perfect  unison.  If  some  ^'s  do  not 
rise  enough  to  preserve  ovir  equation,  others  must  rise  more. 
If  some  rise  too  much,  othm  must  rise  ksa.  Tim  cam  k 
further  fompiicated  by  the  fact  that  some  ptioea  ooiMt 


MKROCOrV  RBOIUTION  TBT  CHART 

(ANSI  and  ISO  TEST  CHART  No.  2) 


A   /IPPLIED  ITs/MGE  Inc 

1653  EQ5t  Main  Street 
r5s      Rocliester.  Ne«  York      14609  USA 

^S,      (716)  *82  -  0300  -  Phone 
^=      (716)  288  -  5989  - 


943      EtXIlBllTAfty  ntlNClPLBS  0*  ECONOMICS  (Cmt.XIV 

adjust  themselves  at  all  and  some  can  adjust  themselves 
but  tardily.  A  price  fixed  by  contract  cannot  be  affected 
by  any  change  coming  into  operation  between  the  date 
of  the  contract  and  that  of  its  fulfiUment.   The  existence  of 
such  contracts  constitutes  one  of  the  chief  arguments  for  a 
system  of  currency  such  that  the  uncertainties  of  its  pur- 
chasing power  are  the  least  possible.  Contracts  are  a 
useful  device;  and  an  uncertain  monetary  standard  dis- 
arranges them  and  discourages  their  formation.   Even  in 
the  absence  of  explicit  contracts,  prices  may  be  kept  from 
adjustment  by  implied  understandings  and  by  the  men 
mertia  of  habit.    And  besides  these  restrictions  on  free 
movement  of  prices  there  are  often  legal  restrictions;  as 
tor  example,  when  railroads  are  prohibited  from  charging 
over  two  cents  per  passenger  per  mile,  or  ^en  street  raS 
ways  are  limited  to  five-cent  or  three-cent  fares.  What- 
ever the  causes  of  non-adjustment,  the  result  is  that  the 
prices  which  do  change  will  have  to  change  in  a  greater  ratio 
than  they  would  were  there  no  prices  which  do  not  chuige. 
Just  as  an  obstruction  put  across  one  half  of  a  stream 
oiuses  an  increase  of  current  in  the  other  half,  so  any  de- 
ficiency in  the  movement  of  some  prices  must  cause  an 
excess  m  the  movement  of  others. 

Another  class  of  goods,  the  price  of  which  cannot  fluctu- 
ate gr^tiy  with  other  prices,  are  those  special  commodi- 
ties which  consist  largely  of  the  money  metal.  Thus,  in  a 
country  employing  a  gold  standard,  the  prices  of  gold  for 
dentistry,  of  gold  rings  and  ornaments,  gold  watches,  gold- 
nmmed  spectacles,  gilded  picture  frames,  etc.,  instead  of 
varymg  in  proportion  to  other  prices,  always  vary  in  a 
smaUer  proportion.  The  range  of  variation  is  the  nar- 
rower, the  more  predominantly  the  price  of  the  article  de- 
prads  upon  the  gold  as  one  of  its  raw  materials. 

Prom  the  fact  that  gold-made  articles  are  thus  more  or 
less  securely  tied  in  value  to  the  gold  standard,  It  foBowi 
also  that  the  prices  of  substitutes  for  such  ar^se  wiS  tend 


CONCLUSIONS  ON  MONEY 


349 


to  vary  less  than  prices  in  general.  These  substitute  articles 
will  include  silver  watches,  ornaments  of  silver,  and  various 
other  forms  of  jewelry,  whether  containing  gold  or  not. 

A  further  dispersion  of  prices  is  produced  by  the  itct  that 
the  special  forces  of  supply  and  demand  are  playing  on 
each  individual  price,  and  causing  relative  variations  among 
them,  and  although  these  variations  cannot  affect  the 
general  price  levd  they  can  affect  the  number  and  eactcnt 
of  individual  divetgendes  above  and  bdow  that  geaeial 
level. 

It  is  evident,  therefore,  that  prices  must  constantly 
change  rdaHvdy  to  each  <^er,  wbatevet  haftpms  to  their 
general  level.  It  would  be  as  idle  to  expect  a  imiform  move- 
ment in  prices  as  a  uniform  movement  for  all  bees  in  a  swarm. 
On  the  other  hand,  it  would  be  as  idle  to  deny  the  existence 
of  a  general  movenMat  oi  fxkes  becaioe  they  do  not  aB 
move  alike  as  to  deny  a  general  movement  of  a  swarm  <A 
bees  because  the  individual  bees  have  different  movements. 
The  ^eral  movement  of  prices  is  expressed  by  an  "  index 
nusto  "  idikii  gives  the  average  levd  of  prices  at  ai^  time 
as  compared  with  some  other  time  used  fm  comparison. 

Besides  the  changes  in  individual  prices,  there  will  be 
corre^nding  changes  in  the  quantities  of  the  commodities 
which  are  exchanged  at  these  prices  req)ectivdy.  In  other 
words,  as  each  p  changes,  the  Q  connected  with  it  will 
change  also,  because  usually  any  influence  affecting  the 
price  of  a  commodity  will  also  affect  the  consumption  of  it 

We  see,  tiierefore,  tiuit  it  k  wdl-idg)i  nsdess  to  vpak  of 
uniform  changes  in  prices  (^'s)  or  of  uniform  changes  in 
quantities  exchanged  (Q's).  Therefore,  instead  of  sup- 
posing such  uniform  changes,  we  must  now  proceed  to  the 
pndldem  oi  devt^ofing  some  amvenient  method  (d  indicatittg 
by  an  average  the  general  trend  of  the  changes  in  prices  or  £ 
quantities.  We  must  formulate  two  composite  or  average 
magnitudes:  the  price  levd  (index  number)  and  the  vol- 


It  fa  daked,  then,  in  the  equation  of  exchange  to  con 
vert  tiie  nght  ^de,  2pQ,  into  the  form  FT,  whS 
the  volume  of  trade,  and  P  is  the  "  index  number^T 

Ja^.  77^1  all  the  g's,  and  P  as  the 

of  meSLTfor't^r  ^  P'-^^*^^^'  ^"^^We 

01  measure  for  the  vanous  articles  must  be  selected  The 

ordinary  miits  in  which  the  various  Q's  are  me^Sed  wm 
not  be  the  most  suitable.  Coal  fa  sold  by  the  ton  suk« 
by  the  pound,  wheat  by  the  bushel,  etc  If  we  stoSd 
««dy  add  together  these  tons,  pounds,  bushels  etc?!^ 
call  tijejr  grand  total  so  many  "  units  "  of  commktii  we 
should  have  a  very  arbitrary  summation.  It  wffl  mSe  a 
^erence  to  the  result  whether  we  measure  coal 
«  hundredwaghts.  The  system  becomes  less  arWtra^ 
and  more  useful  for  the  purpose  of  comparing  price  levek 
m  different  years  if  we  use,  as  the  unit  f«^eiEg  I^y 
commodity,  not  the  unit  in  which  it  fa  commo^^^ 

^yMfcaUed  the  hose  year,  then  er^ry  price  in  the  base 
year  becomes  exacUy  one  dollar,  and  the  o^aToi^ 
pnces  m  that  year  also  becomes  exactly  one  dX  ^ 

ofi^/l^'^'r^r^"  P"^^  ^«  average  of  the  pric J 
oi^  arbitraifly  chosen  miits  which  in  the  base  year  werl 
wo^  a  dollar  vnU  be  the  index  number  repre«^t£g  Se 

^VJZ  '        f '  "^^"^    ^"^^  the  volume 

trade  Thus,  let  us  suppose,  for  simplicity,  that  there 
•re  only  three  commodities  (bread,  coal,  ^nd  cloth),  and  let 
us  use  the  table  on  the  next  page  for  fiu^ts  to  stari^th. 

We  wish  to  compare  the  average  price  or  price  levd  in 
^year  X9X.  with  that  in  x 909  ^  the  bL^^and 
abo  to  reckon  the  total  volume  of  trade  in  X9X2  in  com- 
panson  with  that  in  X909.  H  we  were  not  desirous  o^t^ 
gr^t  pains  to  secure  the  best  results,  we  could  use  theX^ 
figures  just  as  they  stand  -  averagmg  the  prices  uid  .ddk^ 


CXMfCLUSIONS  ON  MOMKT 


together  the  quantities.  By  this  rough-and-ready  method 
the  average  price  per  unit  for  1909  would  be  (.10  -j-  5.00 


Tmmm 

faaoi  (or  DouMi) 

Qmimmi  Bboumb 

Owl  (MB- 

Ym*) 

1909    .  . 
tgia   .  . 

.10 

•IS 

S.OP 
6m 

1.00 

I.IO 

300 

10 
II 

30 
3S 

-I- 1. 00)  -I-  3,  or  $2.03 ;  and  for  i9xa  (.15  -f  6.00+ x.xo)  +3, 
or  $2.42 ;  the  total  trade  for  1909  would  be  200  +  10  -f-  30, 
or  240  million  imits;  and  for  1912,  210  4- 11  -f  35,  or  256. 
That  is,  the  price  level  would  show  a  rise  between  1909  and 
19x2  from  $2.03  to  $2.42,  or  a  rise  of  nineteen  and  two  tenths 
pet  cent,  while  the  volume  of  trade  would  show  a  rise  from 
240  to  256,  or  six  and  six  tenths  per  cent.  But  the  simple 
method  jiat  used  gives  too  much  weight  in  the  price 
conqiarison  to  coal,  the  price  of  which  happem  to  be 
expressed  by  a  large  number  simply  because  it  is  measured 
by  a  large  unit  One  way  to  remedy  this  disproportionate 
weightmg  is  to  measure  all  articles  by  one  unit,  as  the 
pound ;  but  a  better  way  is  that  already  described  above, 
viz.,  to  use  as  our  unit "  the  dollar's  worth  in  1909."  The 
dollar's  worth  of  bread  in  1909  was  evidently  ten  loaves, 
the  ddDar's  worth  of  coal,  the  fifth  of  a  ton,  and  that  of 
doth,  the  yard.  Taking  these  units,  we  now  hav«:— 


Psicxs  (m  DouAKs) 

Bnad  (per 
XtaLnvci) 

Cod  (per 
»Ton) 

Bread  (Ma- 
lions  of  Ten 
Laevci) 

Coal  (MO- 
Ttm) 

Ootbdia- 

lion*  of 

Yum 

1909    .  . 
igis    .  . 

1.00 
1.50 

1.00 
I.30 

1. 00 

I.IO 

30 
31 

SO 
55 

35 

UBBABY  OF  TH'^  UN^VLRSl 
OF  ALBERTA 


The  av»age  Prioe  in  1909,  <m  the  basis  of  these  new  units 
«  «m.ply  $x,  since  this  is  the  price  of  e^AiJ^JS^^! 

^tot.1  ^e  of  t«de  in  1909  is  (in  miUionf 'of  J)' 
20  +  so  +  30,  or  100;  and  in  loi*.  ai  +  ce  j.  ,r 
^u,  accordtog  to  m  "ckoni^^  4e"pric."l.ti'C^ 
lrom$i.ooto»i.j7,or,asitisusuallyerorease<i  frnT.k 
.f  on.  h««tod  p«  «nt  t.  a  hdghtT^h^J^ 
twenty-seven  per  cent  — i  ifa<  «»  f-Tk^^  nunared  and 

;;^e  t«de  h'rn,c^Mj:irssrsrt.^.v 

m^n  units,  an  inaease  of  eleven  per  cent 

for  *^  »«U»<1  by  taking 

^tb«  goods  by  thm  total  ^Mly.  *This  is  a  tot« 
method  because,  in  the  re«Ut,  it  gives  less  weiirfrf  ft 
commodities  less  dealt  in,  such  as  telS  ^tTT  ? 
.90,  will  stiU  be  $,.00,  forl"!Xp„^,n;^^' 
di«durf  anunodity;  but  the  average  to  ig"  ^  t 

^?^e^i'-.><4'^iSlS5,t^-!^^ 

met^ti:th:n',l*pSe  le^t'^rilLt^i  ^ 
^  per  cent)     ,,.3  (or^ne'tl^Vd 
a~  Ptt  cent) ;  this  indicates  a  rise  of  twenty  tl^T^ 
cent  -nie  index  numbers  are  one  hundred  uer  cHTt  iZ 
1909  and  one  hundred  and  twenty-three  n^J^  » 

results  of  the  three  meth^oT^koK/t^^^^ 

^el'tTenf"  '^'^J  -P«^Ca 
nueteoi,  twenty-seven,  and  twenty-three  per  cent 

"hghtly.  No  method  gives  an  absolutely  DerfectiL_  2 
ch^gesni  price  Ievels,but.hcI..t«..'^^:^S2:^2 


OCKHCLtfSlONS  ON  MONtV 


as  good  at  airjr.  The  main  point  in  any  system  ol  avenges 

is  to  give  great  weight  to  the  great  staples  of  trade,  and  little 
weight  to  the  insignificant  articles.  Radium  has  fallen 
in  price  enormously  in  the  last  few  years,  but  radium  is 
so  uninqixMrtant  as  an  article  of  omnmeroe  that  its  great 
fall  ought  not  to  be  allowed  in  our  reckoning  to  have 
much  effect  on  the  index  number  for  the  general  i»ioe 
level. 

Introducing,  then,  our  nei^  found  magnitudes,  P  and 
T,  into  the  equatim  <d  esEchange,  it  assumes  ^  fonn 

MV  +  M'V  =  PT, 

its  right  member  being  the  product  of  the  mdex  number, 
P  (or  the  average  of  prices),  multiplied  by  the  volume  of 
trade,  T  (or  the  sum  total  of  "  units  "  sold). 

1 4«  Th«  BiataKy  of  Me«  Ltftit 

It  is  impossible  to  have  absolutely  acciurate  index  num- 
bers, but  those  omstructed  for  recent  years  by  tiie  Unitad 
States  Bureau  of  Labor  are  accurate  enough  for  all  practical 
purposes.  For  the  remote  past  we  have  only  very  rough 
index  numbers,  because  the  records  of  prices  in  past  times 
are  so  defective.  These  rough  index  numbers  are  suffi- 
cient, however,  to  show  that  the  general  trend  of  prices  dur- 
ing the  last  ten  centuries  has  usually  been  upward.  We 
may  say  that  prices  are  now  five  to  ten  times  as  high  as  a 
thcMsand  years  ago.  Sfaice  the  dfacovery  of  Amorica,  prkes 
have  almost  steadily  risen.  The  successive  (^Mntog  of 
mines  has  been  largely  responsible  for  this  rise. 

For  recent  years  (1896-1910)  we  are  able  to  construct 
fairly  accurate  estimates  of  all  the  factors  in  the  equation 
of  exchange,  M,  M',  V,  V,  P,  T.  The  statistics  of  these 
magnitudes  for  the  fifteen  years  mentioned  are  all  presented 
in  Figure  17.   In  this  diagram  the  equation  of  exchange 


^^i^^P^eZrSSer'^  ^^^^  ^ 
gJSyt^^"       years  «,„sidercd  every  factor 

ST K   1  ^^^^y  °'  in  circulation 

nfnL^^.^  ****  P"^)  about  doubled-  bank 
deposits  subject  to  check  (M'  teonatrnM  u?^'  u  , 

book)  have  about  trebled  Z'^^^JL^^^ 
tented  by  the  weiirht  a*      r^„l,♦^  u     ^      7  ^  ' 

changes,  the  index  number  of  nricea  (      r      i  ! 

^umu  bang  such  as  to  be  each  worth  one  SfaTW 

^  ^«  J2^°  was  399^,000,000  of  S 

faXtS^m^*"'/?"'^-    Similarly,  the  trade 
ioyo  was  191,000,000,000  of  these  iinif«     a.       •  j 

Thfa  is  Pr  L  a  ^  to  X896  was  only  $114,600,000,000. 
L.rlfA  biUion  units  i,^^r 

m  1909)  at  60  cents  each,  the  price  in  1896.  ' 

"^^^^  ^  terms  of  cause  and  effect 
^1^^^^°^^  the  fact  tha^rincr^ 

in  money  and  deposits  and  in  their  vdodties  r™^^^ 

Book,  and  their  increased  distances  from  the  fulcrum)  have 


a- 

I 


} 


S  £ 


■S 


•  j  I 

i  ! 

I  ; 


I 

;  I 


i!! 


OONCLIIBIOIIS  Oil  MOMR 


necessitated  an  increase  in  average  prices  (rq>reseated  by  the 
increased  disCaaceirf  tbe  tny  fitom  the  Mcnim)  in  qpite  oi 
the  increased  volume  of  business  which  has  been  tranncfeed 
(represented  by  the  increased  weight  of  the  tray). 

It  is  interesting  to  observe  the  changes  in  all  the  factors 
before  and  after  the  crisis  of  1907.  These  changes,  it  wiD 
be  noted,  fulfill  the  priiicq)les  oqdained  in  the  chiq^  on 
crises. 

From  1896  to  the  present  time,  the  extraordinary  increase 
in  the  woild's  gdd  productkm,  chiefly  m  South  Africa, 
Cripple  Creek,  and  other  parts  of  the  Rocky  Mountain 
Plateau,  together  with  the  Klondike  region,  has  caused, 
and  is  still  causing,  a  rapid  rise  of  prices. 

The  hntory  <rf  prios  hitt  in  substance  been  a  race  between 
the  increase  in  media  of  exchange  (M  and  M')  and  the 
increase  in  trade  (T),  while  the  velocities  of  circulation 
have  changed  in  a  much  less  d^;ree.  Sometimes  the 
■"'rculating  media  shoot  ahead  of  trade,  and  then  prices 
rise.  Sometimes,  on  the  other  hand,  drcttUtting  media 
lag  behind  trade,  and  then  prices  fall. 

The  outlook  for  the  future  apparently  promises  a  con- 
tinued rise  ai  prkes  due  to  a  omtinued  increase  in  the  gi^ 
supply  and  in  the  use  of  deposit  banking. 

The  most  careful  review  of  present  gold-mining  conditions 
shows  that  we  may  expect  a  continuance  of  gold  inflation 
f(»>agettaration<Mrm<»e.  DeLaunay,aneicdlentattthofity, 
says,  "  For  at  least  thirty  years  we  may  count  on  an  output 
of  gold  higher  than,  or  at  least  comparable  to,  that  of  the 
last  few  years."  This  gold  will  come  from  the  United 
States,  Akaka,  Mexico,  the  Transvaal,  and  oUicr  perts  of 
Africa  and  Australia,  and  later  from  Colombia,  Bofivfak, 
Chili,  the  Ural  Province,  Siberia,  and  Korea. 

It  is  difiGicult  to  predict  the  future  growth  of  trade,  and 
therefore  inqxMsdble  to  say  for  how  hmg  fpM  ami  deporft 
expansion  will  keep  ahead  of  trade.  That  for  many  years, 
however,  they  will  outrun  trade  seems  probable,  far  the 


35^     KLIMIMXAIY  niMGOUi  Ot  SOOMQIIICB    {CkAT.  ZIV 


itMon  tiut  there  is  no  immediate  prospect  of  a  reduction 
in  the  percentage  growth  of  money  and  dqxnUs,  nor  an 

increase  m  the  percentage  growth  of  trade.   Not  only  do 
mining  engineers  report  immense  workable  deposits  in  out- 
lying regions,  but  any  long  look  ahead  must  reckon  with 
possible  and  probable  cheapening  of  gold  extraction.  The 
cyanide  process,  for  instance,  has  made  low-grade  ores  pay 
which  did  not  pay  before.   If  we  let  imagination  run  a 
httle  ahead  of  our  times,  we  may  expect  similar  improve- 
ments in  the  future  whereby  still  lower  grades  may  be 
worked,  or  the  gold  bearing  clays  of  the  South  made  to 
pay,  or  possibly  even  the  sea  compelled  to  give  up  its  gold. 
Like  the  surface  of  the  continents,  the  waters  of  the  sea  con- 
tain many  thousand  times  as  much  gold  as  all  the  gold  thus 
far  extracted  in  the  whole  history  of  the  world.   We  have 
seen  that  inflation  is,  in  general,  an  evil,  likely  to  cuhninate 
in  a  crisis.  It  is  therefore  to  be  hoped  that  the  knowledge 
of  how  to  get  this  hidden  treasure  may  be  secured  but 
gradually,  —  unless  its  sudden  acquisition  may  give  the 
needed  stimulus  to  governments  to  devise  a  more  scientific 
standard  <rf  value  than  the  yellow  metal. 

It  is  unfortunate  that  the  purchasing  power  of  money 
should  be  always  at  the  mercy  of  every  chance  in  gold 
mining.  There  are  few  enterprises  more  subject  to  chance 
than  gdd  mining.  There  are  always  chances  of  finding 
new  gold  deposits,  chances  of  their  "  panning  out "  wdl  or 
ill,  and  chances  of  new  methods  of  metallurgy.  On  these 
fitful  conditions  the  purchasingpower  of  money  is  dependent. 
Consequently  every  one  interested  in  long-time  contracts, 
whether  debtor  or  creditor,  stockholder  or  bondholder,  wage 
earner  or  savings  bank  depositor,  is  made  to  some  extent 
a  partaker  in  these  chances.  In  a  sense  every  one  of  us  who 
nses  gold  as  a  standard  for  deferred  payments  becomes  a 
gold  speculator.  We  all  take  our  chances  as  to  what  the 
future  dollar  wiU  buy.  The  problem  of  making  the  pur- 
chasmg  power  of  money  stable  so  that  a  dolUur  may  h$  • 


CONCLUSIONS  ON  MONXV 


dollar  —  the  same  in  value  at  one  time  as  another  —  is  one 
of  the  most  serious  problems  in  applied  economics.  As  yet 
it  has  received  very  little  attentkm.  The  advocates  <rf 
bimetallism  have  claimed  that  "  the  bimetallic  standard  " 
possesses  greater  stability  than  either  the  gold  or  silver 
standard.  Many  other  and  very  ingenious  schemes  for 
a  more  stable  currency  have  been  proposed,  but  have  re- 
ceived very  little  attention.  As  the  consideration  of  these 
schemes  belongs  to  applied  economics,  we  shall  not  discuss 


CHAPTER  XV 


8TJPPLY  AND  DEMAND 

1 1.  LuUvidual  Prices  Presuppose  a  Price  Level 

We  have  completed  our  study  of  the  purchasing  power  of 
money,  which,  as  has  been  noted,  is  really  a  study  of  price 
levds.  Our  next  topic  wffl  be  individuai  prices.  Prices, 
as  we  find  them  in  the  market,  are  facts  of  everyday  ex- 
perience. As  students  of  economics,  we  are  seeking  the 
explanation  of  these  facts.  Why,  for  instance,  is  the 
price  of  sugar  six  cents  a  ptound  at  one  time  and  seven  or 
five  at  another  ? 

It  has  aheady  been  shown  (Chapter  VIII,  §  i)  that 
individual  prices,  such,  for  instance,  as  the  price  of  sugar, 
presuppose  a  price  level.  This  fact  is  one  reason  why  we 
have  considered  price  levels  before  considering  individual 
prices.  Before  proceeding  to  the  causes  determining  in- 
dividual prices,  it  will  be  advisable  to  explam  more  fully 
this  pnqwnticm  that  an  individual  price  presupposes  a  price 
level. 

The  price  of  sugar  is  a  ratio  between  sugar  and  money. 
Any  one  who  buys  sugar  balances  in  his  mind  the  impor- 
tance of  the  sugar  to  him  against  the  importance  of  the 
money  which  he  has  to  pay  for  it.  In  making  this  com- 
parison, the  money  stands  in  his  mind  for  the  otJier  things 
wlack  it  might  buy  if  not  spent  for  sugar.  If  this  general 
puidiuing  power  of  money  is  great,  money  win  seem 


Sie.  i] 


SOftLY  AMD  OnCAllO 


predotts  in  his  mind,  and  he  will  be  more  loath  to  part 
with  a  given  amount  of  it  than  if  its  purchasing  power  is 
small ;  that  it,  the  greater  the  power  of  money  to  purchase 
things  in  general,  the  less  of  it  will  be  offered  for  sugar  in 
particular,  and  the  lower  the  price  of  sugar  will  therefore 
become.  In  other  words,  the  lower  the  general  price  level, 
the  lower  will  be  the  {wice  of  sugar.  In  o  till  other  words, 
the  price  of  sugar  must  sympathize  with  prices  in  general. 
If  they  are  high,  it  will  tend  to  be  high  '.^d  if  they  are  low, 
it  will  tend  to  be  low.  Before  the  purchaser  of  sugar  can 
dedde  how  much  money  he  is  willing  to  exchange  for  it, 
he  must  have  some  idea  of  what  else  he  could  buy  for  his 
money.  This  explains  why  a  traveler  feels  at  first  so  help- 
less in  a  foreign  country  when  he  is  told  the  prices  of  goods 
in  terms  of  unfamiliar  units.  If  the  traveler  has  never 
heard  before  of  kroner,  gulden,  rubles,  or  milreis,  any 
prices  expressed  in  these  units  will  mean  nothing  to  him. 
He  cannot  say  how  many  of  any  one  of  these  units  he  is 
willing  to  pay  for  any  ffvea  artide  uatil  he  kmwi  haw  Ha 
purchasing  power  of  that  imit  compares  with  the  unit  to 
which  he  is  accustome  i.  There  must  thus  alwa)rs  be  in 
the  minds  of  those  v/ao  use  money  some  idea  of  its  pur- 
diasing  power.  The  sellers  and  buyers  of  st^|;ar  express  the 
prices  at  whic'i  they  are  williag  to  supply  or  to  demand  in 
terms  of  money,  ana  money  means  to  them  merely  piu:- 
chasing  power  over  other  things.  It  is  often  said  that  supply 
•nd  demand  oi  sugar  m  <d  any  other  cmnmodf'  '  (kuvm&ie 
its  price,  and  this  is  true,  at  a  given  price  leve  or  thopu 
who  supply  or  demand  sugar,  in  deciding  ;iow  m"ch 
money  they  will  take  or  give  for  it,  are  influenced  by  their 
idea  of  the  general  purchasing  power  of  money.  This 
needs  emphasis  because  it  is  so  often  overlooked.  Although 
the  purchasing  power  of  money  is  assumed,  we  arc  usually 
as  unconscious  of  it  as  we  are  of  the  background  of  a  picture 
against  whidi  we  see  and  uncmwrioutly  meawire  tht  figurei 
in  tLe  tongtowad. 


ate     luafENXAiY  sunciplis  or  locmoiiics  ICbat.  xv 


f  a.  A  MariEvt  and  Competition 

The  terms  "supply"  and  "demand,"  say,  of  sugar, 
thua  imply  a  concealed  reference  to  the  purchasing  power 
ol  money, ».«.,  to  prices  in  general,  as  well  as  to  the  price  of 
sugar  in  particular.  As  we  have,  through  several  previous 
chapters,  already  studied  the  subject  of  prices  in  general, 
we  shall  hereafter  assume  that  the  general  level  of  prices 
has  been  determined  in  accordance  with  the  principles  set 
forth  in  those  chapters  relating  to  the  eonation  of  exchange. 
We  are  now  ready  to  leave  these  general  relations  and  to 
study  the  determination  of  a  particular  price  (such  as  that 
of  sugar)  so  far  as  this  depends  iqxm  its  own  particular 
supply  and  demand  in  its  own  particular  market. 

A  market  for  any  good  is  any  assemblage  of  buyers  and 
sdleis  of  that  good.  The  buyers  and  seUers  may  be,  and 
usually  are,  physicaUy  near  each  othw,  as  on  the  New  York 
Stock  Exchange,  or  they  may  be  merely  connected  by  tele- 
graph, telephone,  or  other  means  of  communication,  as  in 
the  stock  market  as  a  whole;  for  the  stock  market  as  a 
whole  includes  not  only  the  members  of  the  stock  exchange, 
but  also  all  other  buyers  and  sellers  of  stock  both  in  and 
out  of  the  dty.  It  is  in  the  market  that  questions  of  supply 
and  demand  which  we  are  about  to  discuss  work  th«m- 
adves  out. 

Our  study  of  price  determination  will  faU  under  two 
heads,  according  as  there  is  competition  or  monopoly. 
For  the  present  we  shall  assume  a  condition  of  perfect 
competition;  that  is,  we  shaO  assume  that  there  are  a 
number  of  buyers  and  seUers  each  of  whom  offers  to  buy 
or  seU  mdependently  of  the  others.  Thus,  if  self-interest 
leads  hmi  to  do  so,  a  buyer  will  bid  a  higher  price  than 
oUiers,  irrespective  of  thdr  widies  in  the  matter,  and 
hkewise  aseUerwillaskalowwpifceifliii  independent 
self-mterest  so  leads  him. 


8k.  al 


SOWLY  AND  OBIAMO 


When  there  is  perfect  competition,  there  is  (in  a  given 
maricet)  only  one  resultant  price  for  all  buyers  and  all 
sdlers.  This  is  evidoit;  for  if  ttoe  were  matt  than  ooe 

price,  no  buyers  would  buy  at  any  of  the  higher  prices 
which  had  first  been  asked  (and  so  these  must  fall),  and  no 
seller  would  sell  at  the  lower  prices  which  ha  J  been  bidden 
(and  so  these  must  rise).  The  watchfulness  ot  one  com- 
petitor toward  the  others  will  eliminate  differences  in 
price.  Even  though  not  all  buyers  and  sellers  are  careful 
to  note  slight  differences  in  price,  the  more  watchful  bring 
about  the  same  result  by  the  operation  ci  what  is  called 
"arbitrage."  They  buy  at  the  lowest  prices  and  sdl  at 
the  highest.  Their  buying  raises  the  lowest  i»ioes,  and 
their  selling  lowers  the  highest. 

In  these  ways  differences  in  prices  are  reduced  or  entir^ 
eliminated.  It  is  true  that  in  practice  there  often  remain 
slight  differences  in  '^rice,  even  in  the  same  or  closely  as- 
sociated markets.  Tnis  fact  merely  means  that  competi- 
tion is  often  imperfect.  In  our  discussion  we  shall  not  take 
account  of  those  cases,  but  cumSda  oofy  the  simide  case 
where  competition  is  perfect 

§  9.  Demand  and  Supply  Schedules 

The  terms  "  supply  "  and  "  demand  "  have  a  definite  and 
technical  meaning  in  economics,  and  the  reader  should  note 
the  followmg  definitions  carefully. 

In  any  market  there  is  a  different  demand  for  sugar  at 
different  prices.  We  may  define  the  demand  at  a  jnwn 
price  as  the  amount  of  sugar  which  people  are  willing  to 
buy  at  that  price.  In  the  same  way  the  mpply  at  a 
given  price  is  the  amount  which  people  are  willing  to 
sell  at  that  price.  If  th?  price  of  sugar  is  8  cents  a  poimd, 
the  demand  for  sugar  in  i  given  community  at 'a  given  time 
may  be,  let  us  say,  900  pounds  a  we^.  H  the  pAat  ftifift 
to  7  centl^  the  demand  woidd  faicreaa^  say,  tc  940  poondi. 


262 


MuaaaxuKS  nmcims  or  »«w»tmhict  fcktf.xv 


If  the  price  falls  to  6  cents,  the  demand  would  rise,  say  to 
looo  pounds ;  and  so  on. 

The  supply  of  sugar,  we  shaU  suppose,  changes  in  the 
opposite  way.  At  8  cents  it  may  be  iioo  pounds;  at  7 
<»nt8,  1050;  at  6  cents,  1000;  etc.  The  following  table 
shows  these  figures  and  others,  and  constitutes  what  an 
called  "  schedules  "  of  demand  and  supply  in  relatkm  to 
various  prices. 

The  schedule  of  demand  is  the  second  column  considered 
relatively  to  the  first.  It  shows  the  largest  quantity  whidi 
wiU  be  taken  at  each  given  price,  or,  what  amounts  to  the 
same  thmg,  the  highest  price  at  which  a  given  quantity  will 
be  taken.  When  the  relationship  between  the  two  columns 
is  expressed  in  the  latter  of  these  two  ways,  it  is  more  con- 
vement  to  place  the  second  column  first,  and  the  first,  second  • 
but  their  order  is  immaterial.  It  is  their  relation  to  each 
other  whifji  constitutes  the  demand  schedule. 


In  the  same  way  the  relation  between  the  first  and  third 
columns  constitutes  the  supply  schedule.    This  teUs  us  the 
largest  quantities  which  will  be  suppUed  at  stated  prices 
or,  what  amounts  to  the  same  thing,  the  lowest  prices  at 
which  stated  quantities  will  be  supplied. 

Running  the  eye  down  the  table,  we  see  that,  although 
the  supply  at  first  exceeds  the  demand,  as  the  price  falls 
the  demand  increases  and  the  supply  decreases,  until, 
when  the  price  reaches  6  cents,  supply  and  demand  are 


tK.4l 


equal.  For  prices  lower  than  6  cents  we  find  the  leverse 
aniditi(m,  demand  exceeding  supply. 

If  the  foregoing  figures  represent  the  demand  and  supply 
schedules  showing  the  amounts  that  buyers  are  willing  to 
take  and  sellers  to  give  at  different  prices,  it  isdear  that  there 
is  only  one  price  that  will  make  supply  and  demand  equal. 
That  price  is  6  cents,  and  that  is  the  price  that  supply  and 
demand  will  finally  fix.  The  price  cannot  long  be  above 
6  cents,  for  then  supply  would  exceed  denumd,  and  the 
price  would  immediately  fall.  Nor  can  it  be  below,  for  thou 
demand  would  exceed  supply,  and  the  price  would  rise.  For 
instance,  if  the  price  were  8  cents,  the  supply  (i  loo  pounds) 
would  exceed  the  demand  (900  pounds)  by  200  pounds. 
Those  wishing  to  sell  this  extra  amount  would  then  be  imable 
to  do  so  except  by  offering  it  at  a  lower  price,  and  their  com- 
petition would  drive  che  price  down.  On  the  other  hand, 
if  the  prke  were  4  cents,  the  demand  (1350  pounds)  would 
exceed  the  suj^ly  (750  pounds)  by  500  poimds,  sod  those 
demanding  this  extra  amount  would  be  imable  to  get  it  ex- 
cept by  bidding  a  higher  price,  and  their  competition  would 
then  drive  the  price  up. 

Since,  thou,  the  price  cannot  really  be  either  above  or 
below  6  cents,  it  must  be  finally  fixed  at  6  cents.  A  price 
which  thus  makes  supply  and  demand  equal  is  said  to 
"  clear  the  market,"  and  is  called  the  market  price.  The 
amounts  sufqdied  and  donanded  at  the  market  price  are 
called  the  amount  marketed,  ix.,  the  amount  actually  bought 
by  buyers  and  sold  by  sellers.  This  amount  marketed  is, 
therefore,  at  once  the  market  demand  and  the  market  supply. 

1 4.  DamuBd  tad  Sofflf  Oum§ 

The  relations  discussed  in  §  3  above  can  be  seen  more 

doirly  by  means  of  a  diagram.  In  Figure  z8  k  rqjie- 
sented  the  demand  for  sugar  at  different  prices. 

The  two  axes  OX  and  OY  are  drawn  sunply  for 


*44        ILMONTAav  FMNdPUeS  Of  CCONOmCS  ICMr.XV 

reference,  like  the  equator  and  the  Graenwidi  meriditti  b 

a  map.   The  intersecUon  O  of  the  two  axes  is  called  the 
ongin.     The  diagram  b  a  "  map  "  of  demand  on  which 

thc"laUtude,"or 
the  distance  al)o>ve 
the  line  OA",  repre- 
sents any  price; 
and  the  "longi- 
tude,"  or  the  dis- 
tance to  the  right 
of  the  line  OF, 
represents  the 
amoimt  demanded 
at  that  price.  Let 
us,  for  instance, 
represent  an  as* 
sumed  price,  say 
8    cents,  by 


Y 
It 
II 
w 
a 
a 

a 

I 


leoe  1800 


meMuri^  "Utitude"  Oy  from  the  orij^n 

At  Uus  pnce  of  8  cents,  ihe  demand,  which  we  havVseen 
to  be  900  nounds,  is  represented  by  the  "  longitude  »  yD 

^^l:  ^         ^'  ^«  "  l^tit^de  "  of  wWch 

represents  a  particular  price  (8  cents),  and  the  "longitude" 

nrirl   T.  T^"*"  (900  pounds)  at  that 

pnce  It  will  be  seen  that  the  "latitude"  is  simply  the 
^vauon  above  the  base  axis  OX,  whether  we  mLTe 

longitude  IS  simply  the  distance  of  Z;  to  the  right  of 
the  axis  OF,  whether  this  distance  be  measured  by  yZ>  or 

P°^^'  ^'  "latitude"  and 
toi^tude  of  which  represent,  respectively,  a  price  and 
the  demand  at  that  price,  we  may  find  in  like  mamier 
other  pomts,  the  "  latitudes  "  and  « longitudes  "  of  wWch 
^Ur^i^nt  other  particular  prices  and  the  demands 
fon«P2»fng  to  those  prices.  Several  such  points  are 
indicated  In  Ftguie '8.  It  wifl  be  seen  that  thrower  k 


8k.  4l 


•UrVLY  AND  nniAMD 


the  <fiagnun  the  points,  the  farther  they  ue  to  the  rl^t 
This  represents  the  fact  that  the  lower  the  price,  the  greater 
the  demand.  We  may  suppose  the  spaces  between  thow 
various  points  to  be  filled  by  (^her  points,  all  together 
forming  what  is  called  the  dmmmd  enne. 

A  demand  curve,  then,  is  a  curve  such  that  the  "lati- 
tude "  of  any  one  of  its  points  represents  a  particular  price, 
and  the  "  knigitude  **  d  that  pdnt  the  particular  denand 
corresponding  to  that  jwice.  Thus  a  demand  carve  b  a 
graphic  picture  of 
a  demand  sched- 
uk. 

In  predsdy  the 

same  way  we  may 
treat  supply.  In 
Figure  19  let  us 
represent  any  par* 
ticular  price,  say 
8  cents,  by  the 
"latitude"  Oy, 
and  the  supply 
corresponding  to 
this  price  (iioo 
poimds)  by  the 
"longitude"  yS. 


n 

lO 

7 
• 

8 

« 

a 

I 


Thus  we  locate  a  pobt  S  such  that  Its 
"  latitude  "  {Oy  or  xS)  represents  a  particular  price,  and 
the  "longitude"  (yS  or  Ox)  represents  the  supply  at  that 
particular  price.  In  like  manner  we  may  locate  oilier 
points,  the  "latitudes"  of  which  represent  other  pikes 
and  the  "  longitudes  "  of  which  represent  ^e  amounts 
which  would  be  supplied  at  these  respective  prices.  These 
points  are  so  arranged  that  the  hi^er  their  "  latitude," 
greater  their  "  longitude."  This  represents  our  assumption 
that  the  higher  the  price,  the  greater  the  supply.  The 
curve  which  these  points  form  is  called  a  s\q>ply  curve  and 
is  a  grs^hic  picture  of  a  siq^ly  schedule. 


5 

0" 

s 

D' 

1 

•66     smmiTAiy  pkinciplxb  o»  xconomics  icw.  xv 

In  Figure  30  are  drawn  both  the  supply  and  th« 
demand  curvei,  the  demand  curve  being  Diy,  and  the 
■apply  cm  We  have  seen  that  the  demand  curve 
shows  many  different  demands  at  many  different  prices, 
and  that,  simiJarly,  the  supply  curve  shows  many  difew 

ent  supplies  at 
many  different 
I'ltces;  but  that 
there  is  only  one 

|j[  [  T  I  I  I  I  I  I  Xtii  Ifcj  "TTi —  P"ce  at  which 

supply  and  de- 

Pl  I  [  I  I  M  I  I  INAil  MM"   maml  are  equal 

We  can  see  this 
clearly  in  Figure 
20;  for  there  is 
only  one  point  (P) 
in  which  the  two 
_  curves  intersect. 
The  "latitude" 

*       .     ,  ,  (OP*)  of  the  hi- 

tersection  (P)  of  the  curves  DL/  and  SS'  represents  the 

Tltl,^'  J?*  "  "     ^  represents  the  amount 

markeM,  which  is  at  once  the  supply  at  that  price  and  the 
demand  at  that  price.  The  point  P  may  be  called  the 
market  point. 

The  market  price,  OP',  clears  the  market,  and  no  other 
^"^nJi^.^.  ^*  instance,  we  take  a  higher  price,  such 
D'/c/^^  '  supply  will  be  represented  by  the  long  line 
r  S  ,  and  the  demand  by  the  ??hort  line  P"D'\  leavinjs  the 
difference  between  them,  or  D"S",  as  the  excess  of  supply 
oyer  demand.  The  ^ort  of  seUers  to  get  rid  of  this  excea 

J    P"""®  '^^'^  Prfa  cannot 

exceed  OP .   In  like  manner,  the  market  price  cannot  be 
lower  than  OP .   If,  for  instance,  it  were  only  OP'"  the 
demand  would  be  P"'!)".',  and  the  supply  only  P"'5"' 
wavmg  an  access  of  demand  over  sqiply  of  J?"'^"',  which 


•umY  AMD  snum 


••7 


•t  thftt  price  the  buyers  tre  unaUe  to  obtalh.  Tbey  wID 
therefore  bid  up  the  price.  We  see,  then,  that  tbft  only  imI 

price  is  OP'.  The  point  P,  at  which  the  two  curves  in- 
tersect, is  the  only  real  point,  the  latitude  of  which  repre- 
sents the  market  price  and  the  longitude  the  actual  amount 

demanded  and  sold.  All  the  other  points  in  the  two  curves 
are  hypothetical,  representing,  not  what  demand  and  supply 
actually  are,  but  what  they  would  be  at  other  prices  than  the 
real  maricet  price. 

All  demand  curves  descend  to  the  right.  But  they  de- 
scend at  different  rates.  Those  demand  curves  which  are 
steep  —  descend  very  rapidly  —  represent  the  demand 
schedules  of  those  goods  which  are  called  necessities,  iot 
the  rapid  descent  means  that  it  reqmres  a  great  fall  of 
price  to  affect  demand  materially.  They  have  an  "in- 
elastic" demand,  which  will  "stretch"  but  little  whatever 
the  change  in  price.  We  know  that  the  demand  for  a 
necessity  such  as  salt  does  not  change  greatly,  even  if  the 
price  changes  much.  Otherwise  expressed,  a  necessity  has 
an  "inelastic"  demand  which  will  "stretch"  or  expand 
but  IMe  for  a  given  fall  in  ^irice.  At  the  other  extreme 
are  luxuries,  the  demand  curves  of  which  descend  very 
slowly,  thus  interpreting  the  fact  that  a  slight  fall  in  price 
produces  a  great  expansion  in  demand.  Otherwise  ex- 
pressed, a  luxury  has  an  "elastic"  demand  which  will 
"stretch"  oi  expand  much  for  a  given  fall  in  price.  If 
the  price  of  champagnt,  for  instance,  is  slightly  changea, 
the  amoimt  of  it  consumed  will  be  materially  affected. 

In  the  same  way  supply  curves  may  ascend  at  different 
rates,  the  steep  ones  representing  commodities  the  mi^pflty 
of  which  is  "inelastic,"  that  is,  cannot  expand  very  much 
for  a  given  increase  in  price.  At  the  opposite  extreme  t  u 
the  sui^y  curves  which  ascend  very  slowly,  being  those  -  ( 
commodities,  the  sui^lyof  which  is  very  "elastic" — Citi 
be  greatly  increased  by  a  given  increase  in  price. 

Most  of  the  articles  produced  in  extractive  industrit. 


"Sis'- 


a68      ELEMENTARY  PRINCIPLES  OP  ECONOMICS  IChaf.XV 

such  as  agriculture  or  mining  are  of  the  rapidly  aacendinK 
manufactured  articles  often  iUustrate  the 
shghUy  ascendmg  type.  It  requires  a  great  increase  m  the 
pnce  of  coal  to  affect  materially  the  output  of  coal  mines, 
but  It  requires  only  a  slight  rise  in  price  of  manufactured 
products  to  lead  to  an  enormous  in Jiasc  in  iSbou!^^ 

§  5-  Shifting  of  Demand  or  Supply 

supply  and  demand  by  curves  we 
are  now  in  a  posiUon  to  understand  more  clearly  what  is 
meant  by    mcrease  of  demand  "  or  "  increase  of  supply." 

*w  *f  "'"^  ^°°s«ly'  '^thout  real^tion 

that  ^they  are  ambiguous.     Somethnes  we  hear  it  said 

n?^n«  ^Tf^A  "  when  the  speaker  merely 

means  that  demand  has  increased  as  a  consequence  of 
a  fall  in  the  market  price;  that  is,  the  demand  at  a  new 
T^^t  ^"^'^  demand  at 

I? M  u     .         "^'^^^  P"'^'  the  demand 

at  this  old  pnce  remains  unchanged.  Thus  if  the  price 
of  sugar  falls  from  8  cents  to  5  cents  per  pound,  the 
demand  at  the  new  market  price,  5  cents,  ^ceed 

though  the  amount  demanded  at  8  cents  may  regain 
unaltered  and  the  amount  demanded  at  5  cents  may 
remain  unaltered.  In  this  case  the  demand  schedJe 
nmaua  unchanged.  Only  the  particular  demand  in  that 
schedule  which  corresponds  to  the  maiket  price  is  shifted 
downward  in  the  second  cdumn  (see  §3). 

Again  and  more  properly,  we  hear  it  said  that 
demand  has  mcreased  "  when  the  speaker  means  that  the 
demand  at  a  specified  price  has  increased ;  as,  for  instance 
that  more  sugar  is  demanded  at  8  cents  than  formeriy' 
and  more,  likewise,  at  5  cents,  or  any  other  price;  that  in 
short  the  demand  schedule  has  changed  through  the  in- 
cieaac  of  the  figures  in  the  second  column. 


8k.  si 


SDmy  AMD  mCAMD 


369 


The  two  meanings 
which  have  been  distin- 
guished may  be  dea%- 
nated  respectively  as  "in- 
crease of  the  market 
demand  "  and  as  "  increase 
ct  the  demand  Kkedule." 
We  have  spoken  only  of 
changes  in  demand.  But 
the  same  distinctions  apply, 
<d  course,  to  two  meanbgs 
of  the  phrase  "iiwrease  ci  sapply, 

Y 


Fn.  at  (Dotaad). 


Wm.  tt  (P—wd). 


one,  an  mcrease  m 
the  market  supply,  and  the 
other,  an  increase  in  the 
supply  scheduk. 

We  may  see  clearly  the 
distinction  between  these 
two  meanings  of  the  phrase 
"  increase  of  demani "  and 
avdd  thdr  confusbn  if  ire 
express  them  by  means  of 
2  diagrams.  Increase  of  de- 
mand may  mean  a  mere 


shifting  of  the  market  point  fxom  <me  positicm  A  to  aaotfaor 
position  B,  farther  to  the 
right  on  the  same  demand  Y 
curve  (Fig.  21),  or  it  may 
mean  a  shifting  of  the  entire 
demand  curve  from  the  posi- 
tion A  to  the  position  B, 
forttor  to  the  right  (Fig.  2  2) . 

Both  of  these  meanings 
are  admissible,  but  they  are 
entirely  distinct.   In  the 
samtt  way,  "increase  of  " 
supply  "  may  mean  one  of 


a70       ELEMENTARY  PRINCIPLES  OP  KCONOMXCS  tCiUf.JW 

two  things,  either  a  shifting  of  the  market  paint  A  to  another 
position  B,  farther  to  the  right,  on  the  same  supply^ 

(Fig.  23),  or  a  shifting  of 
the  entire  supply  curve  from 
the  position  il  to  the  posi- 
tion B  farther  to  the  right, 
as  in  Figure  24.    We  see, 
therefore,   that   an  "in- 
crease of  supply"  or  of 
demand  may  mean  either 
a  change  of  the  market 
point  on  the  same  curve 
or  a  change  of  the  curve 
itself. 

It  will  be  seen  that  an 


fn-  M  CSitpiiljr). 


"2 


.  ,  XI  will  oe  seen  tnat  an 

increase  of  d«nand  m  the  market  sense  is  nothing  else  than 
an  mcrease  of  supply  in  the  schedule  sense;  for  we  have 
aJready  made  it  clear  that  there  is  onfy  one  pobt  wliidi  ii 
the  intersection  of  the  two 
curves,  and  that  this  point  Y 
cannot  be  shifted  to  the  right 
from  .4  to  5  on  the  demand 
curve  unless  the  whole  sup- 
ply curve  has  shifted  so  as 
to  change  the  intersection. 
Such  a  shifting  is  seen  in 
Figure  25.  Here  the  demand 
has  increased  in  'he  market 
sense,  having  changed  from 
the  longitude  of  A  to  the 
longitude  of  B  on  the  same 
toand  curve;  but  this  increased  demand  comes  about 

^^T^.^V'^V^  ^  ^  "^^^^  sense, 

havmg  shifted  from  the  position  of  the  nnbtoken  siiDplv 
curve  to  the  position  of  the  dotted  curve.^^^ 
To  express  these  changes  in  terms  of  the  schedules  of 


0 


P».  9$. 


SUPPLY  AND  DEICAND 


37X 


§3,  let  us  suppose  that  the  supply  schedule  is  changed  by 
the  addition  of  200  pounds  of  sugar  to  each  quantity 
given  in  the  third  column.  It  is  evident  that  the  market 
price  will  faU  from  six  <xnts  (at  wbich  mxpj^  and  demand 
were  each  1000)  to  five  cents  (at  which  supply  and  de- 
mand are  each  iioo).  Thus  the  demand  at  the  market 
price  has  increased  from 
xooo  to  IIOO  as  a  con- 
sequence of  the  increases 
in  the  'upply  schedule. 

Again,  to  say  that  sup- 
{dy  has  increiused  in  the 
market  sense  is  the  same 
thing  as  to  say  that  the 
demand  has  increased  in 
the  schedule  sense.  Thu 
is  shown  in  Figure  26, 
where  the  market  point 
A  on  the  supply  ciu*ve 
has  shifted  to  B  on  the  same  curve,  because  tlw  ^mmf^ 
curve  had  shifted  from  i^e  tmbroken  to  the  dotted  posi- 
ticHL  The  same  result  can,  of  course,  be  expressed  ut 
terms  of  a  change  in  the  demand  schedule  of  §  3. 

We  should,  therefore,  be  careful  to  know,  whoi  we  wpak. 
of  a  change  in  demand  or  supply,  whether  we  mean  that  the 
change  is  in  the  mRxket  sense  or  in  the  schedule  sense.  It 
seems  odd  at  first  to  think  that  an  increase  of  demand  in 
one  sense  u  really  an  increase  <A  supply  in  another  seme, 
and  vice  versa.  Because  of  this  ambiguity,  when  one 
person  speaks  of  an  increase  of  supply,  it  means  the  same 
thing  as  when  another  speaks  of  an  increase  of  demand. 

To  ittustrate  the  two  meanings,  let  us  suppose  that  tltt 
demand  considered  is  the  demand  for  automobiles,  and 
that,  given  the  same  price,  people  would  demand  auto- 
mobiles now  no  more  and  no  less  than  they  did  a  few  years 
ago,  bat  tfaftt  the  conAMmh  of  the  supply  have  duinged,  so 


»7»       MONXARY  PIINCIPIM  OF  ECONOMICS  IQU».  XV 

that  now  more  automobUes  can  be  suppUed  for  the  same 

^I'^^  A  .    u  «"PPly  curve  had 

shifted  to  the  nght,  so  that  its  point  of  intersection  with 
the  same  demand  curve  has  also  shifted  to  the  right 
(Fig.  25).   Therefore  two  things  have  happened  on  the 
demand  side.   The  market  price  has  faUen,  and  as  a  con- 
sequence of  that  faU  of  price  the  number  of  automobiles 
demanded  has  mcreased.   The  demand  at  the  market  price 
has  merged  but  the  demand  schedule  has  not  changed 
at  aU.   People  are  just  as  willing  as  before  to  take  an 
automobile  at  any  given  price,  but  they  ?re  willinir  to 
take  more  automobUes  at  present  low  prices  than  at 
form«  high  prices.   There  have  been  no  changes  in  the 
conditions  of  demand,  U.,  the  demand  schedule.  What 
^""^^e  ^  conditions  of  supply,  U.,  the  supply 

^"t^'     us  take  as  our  iUustrafion  works  of 

ST  th.^tt?7^^  r  ^  ^^'"^  ^  ^  *  change 
in  the  attitude  of  Amencans  toward  works  of  art.  Of  th(»e 

^  are  much  more  appreciative  than  we  used  to  be,  and  are 

wflhng  to  pay  more  for  instance,  for  a  fine  painting  than 

previously^  Thus  for  works  of  art  the  demand  schedule 

has  shifted ;  the  demand  for  works  of  art  has  increa^ 

m  the  schedule  sense  (Fig.  26).    Consequently,  the  supply 

has  mcreased  in  the  market  sense;  namelyf'on  acco^iS^ 

oL^^  P"**  ^  '^''^  therefore 

fo7Se  of  art  have  oflFered  more 

Thus  increase  of  demand  m  the  schedule  sense  brings 
about  mcrease  of  supply  in  the  maritet  sense,  and  ^ 
versa^  An  increase  in  the  supply  of  automobfles  in  the 
schedule  sense  brought  about  an  increase  in  the  demand 
for  automobiles  m  the  market  sense,  while  an  increase  in 
the  demand  for  works  of  art  in  the  schedule  sense  brought 
about  an  increase  in  the  supply  of  works  of  art  in 
market  sense.  In  either  case  the  original  change  is  i 


Sk.s1 


SUPPLY  AND  DSMANO 


schedule  or  curve.  There  can  evidently  be  no  change  of 
points  of  intersection  except  by  a  change  in  at  hast  one  of 
the  two  curves.  Hereafter  we  shall  use  the  pi  jases  "  in- 
crease of  supply  »  or  "increase  of  demand"  only  in  the 
sense  of  shifting  to  the  right  the  supply  or  demand  curve;  in 
other  words,  of  increasing  the  figures  of  demand  or  supply 
in  the  demand  or  supply  schedules. 

When  we  shift  demand  or  supply  curves,  the  effect  on 
the  intersection,  i.e.,  on  the  market  price,  and  the  amount 
marketed,  will,  as  is  evident  from  the  figures,  depend  greatly 
on  the  character  of  the  curves;  whether,  for  instance,  one 
or  both  of  them  ascend  rapidly  or  slowly.  It  wOl  be  in- 
structive for  the  student  to  draw  on  paper  various  pairs  of 
intersecting  curves,  making  one  or  both  nearly  horizontal, 
and  again  one  or  both  nearly  vertical,  and  to  observe  the 
various  effects  then  obtained,  first,  by  shifting  the  demand 
curve  a  given  distance  to  the  right  or  left,  and  second,  by 
shifting  the  supply  curve  a  given  distance  to  the  right  or 
left.*  In  actual  fact,  demand  and  supply  curves  are  con- 
stantly shifting,  with  the  result  that  their  pobt  of  inter- 
section is  constantly  shifting,  sometimes  to  the  right, 
sometimes  to  the  left,  sometimes  up  and  sometimes  down. 
Consequently  the  market  price  and  the  amount  marketed 
are  changing  from  time  to  time. 

The  causes  which  shift  the  curves  are  immmenble. 
Changes  in  taste  or  fashion  will  affect  demand  curves,  while 
changes  in  methods  of  production  will  affect  the  supply 
curves.  For  instance,  fashion  and  outdoor  qwrts,  includ- 
ing motoring,  have  increased  the  demand  for  fur  coats, 
and  have,  therefore,  raised  their  price;  while  improved 
machinery  has  increased  the  supply  of  shoes  and  has 
consequently  kmered  their  price. 

» Observe  that  when  the  demand  curve  is  shifted,  the  chuge  in  prkt 
Involved  depends  upon  the  steepness  of  the  supply  curve;  and,  tiee  m$t, 
t  when  the  si^ly  curve  it  ihifted,  the  cbuge  in  |wke  * — *— 1 1tinnfc 
vpoa  the  itfrpnen  <rf  the  deauuad  aim. 


974       UBMINTASy  niN(mi8  or  tCONOMXCS  ICbat.XV 

As  to  the  variable  point  of  intersection,  we  are  more  in- 
terested in  its  latitude  than  in  its  longitude,  for  the  Utitude 

represents  the  market  price.  This  market  price  wiU  evi- 
dently nse  with  a  rise  in  either  curve,  and  faU  with  a  fall  in 
either  curve.  It  wiU  also  rise  with  a  shifting  of  the  demand 
curve  to  the  right,  or  with  a  shifting  of  the  supply  curve 
to  the  left ;  and  will  f aU  with  a  shifting  of  the  demand  curve 
to  the  left,  or  of  the  supply  curve  to  the  right.  In  fact, 
by  a  leftward  change  in  the  demand  curve  or  a  rightward 
change  in  the  supply  curve,  the  price  may  faU  to  zero.  A 
standard  example  of  such  a  case  is  furnished  by  the  air  we 
breathe,  the  supply  of  which  is  so  much  greater  than 
the  demand  that  it  bears  no  price.  The  same  is  often  true 

of  water  and  of 


1 

I 

-\ 

_ 

i 

\ 

> 

• 

- 

land  of  inferior 
qualities.  There 
are  millions  of 
acresof  land  whidi 
may  be  had  for 
practically  nothing 
(a  fact  of  much 
importance  to  be 
emphasized  in  a 
futur-  "-apter). 

Or  c  /  use  of 
ahift'iu'  demand 
and  ply  curves 
mentioned  in  a 
general  way  at  the 

,    .  . ,  oeginning  of  this 

Chapter  we  ivish  espedaU:,  to  emphasize.  This  cause  is  a 
change  in  the  general  purchasing  power  of  money.  Let  us 
suppose  that  we  change  our  monetary  unit  so  that  what  is 
now  fifty  cents  should  be  called  a  dollar.  This  would  mean 
that  the  purchasing  power  of  a  dollar  had  been  cut  in  two 
or  that  the  level  of  prices  had  been  doubled.  We  ought,' 


Fn.  aj. 


SUPPLY  AND  DEMAND 


therefore,  to  find  that  the  demand  and  supply  of  sugar  wl'l 
have  been  affected  so  as  to  double  its  price— the  latitude  of 
the  point  of  intenectkm— and  this  will  be,  in  fact,  the 
result,  unless  prevented  1^  some  interfering  cause.  As  soon 
as  the  half-dollar  becomes  a  dollar,  the  price  in  "  dollars  " 
at  which  any  given  amount  of  sugar,  such  as  Ox  (in  Fig,  27), 
isdonanded,  will  evidently  bedoubled,  becoming  xB,  which  is 
twice  If  previously  people  were  wilUng  to  take  Oar  at  (nte 
price,  they  are  now  willing  to  take  it  at  double  that  price,  be- 
cause this  double  price  means  in  purchasing  power  exactly  the 
same  thing  as  the  original  price.  And,  in  fact,  all  points  in 
the  demand  curve  will  be  shifted  to  be  twice  as  high  as  before. 
In  the  same  way  and  for  the  same  naaaa,  those  wiio 

have  sugar  to  sell 

will  require  twice 

as  high  a  price  as 

before  for  a  given 

amount;  because, 

otherwise,  they 

w(mki  not  get  the 

same  purchasing 

power  as  before  in 

return.    Thus,  as 

indicated  in  Figure 

28,    each  point, 

such  as  ^,  in  the 

supply  curve,  will 

be  shifted  to  twice 

as  high  an  elevation 

above  the  base,OJf. 

When  the  twocurves  thus  shifted  are  drawn  on  thesame  axes 
(see  Fig.  29),  it  is  evident  that  the  new  pdnt  of  intenection, 
B,  will  be  vertically  over  the  old  point  of  mtersection,  A. 

The  market  price  of  sugar  is  therefore  doubled,  though 
the  amount  marketed  is  unchanged.  Simply  the  doubling 
of  the  genenl  piioe  levd  cante.  with  U  a  dn^ng  to  ^ 


i 

*  - 

1 

-/ 

y- 

FlM.  aS. 


376     KummxAiY  vsnrann  ot  woMoifics  (Our.  xv 

price  of  sugar.  While  the  supply  and  demand  curves  for 
sugar  may  diange  for  many  other  rea  >ns  than  the  dou- 
bling m  general  price  level,  so  far  as  this  cause,  taken  by 
Itself,  is  concerned,  its  effect  on  prices  is  to  double  them. 
Our  analysis  of  demand  and  supply  curves  then  brings  us 
tow*  to  the  fact  already  stated,  that  the  price  of  any  par- 
ticular good,  like  sugar,  depends  parUy  on  the  general 
level  of  prices,  or  the  purchasing  power  of  money. 

We  can  now  see  more  clearly  than  before  the  shaUowness 
of  the  idea  that  the  supply  and  demand  of  each  individ- 
ual commodity  fix  its  price  independently  of  other  com- 
modiUes.  According  to  this  view,  the  general  price  level 
IS  regarded  as  the  effect  of  innumerable  individual  pairs  of 
•upply  and  demand  curves,  each  pair  being  supposed  to 
completely  determine  some  one  price.  The  opposite  is  the 
truth.  The  general  price  level  is  not  the  result  of  the  supply 
and  demand  of  sugar  in  relation  to  money,  but  is  it  one 
of  the  causes  affecting  the  supply  and  demand  of  .  in 

relaticHito 
for  we  have  seen 
(Figs.  27,  28  and 
29,  and  discussion) 
that,  as  the  piice 
level  rises  or  falls, 
':he  price  of  sugar 
rises  and  falls  cor- 
responding^. 

We  end  this 
chapter,  therefore, 
with  the  state- 
ment with  urtiich 
we  b^an;  name- 
ly, that  it  is  im- 
portant to  disdn- 

^  guish  between  the 

influences  determining  the  general  price  level  and  the 


SUPPLY  AND  DEMAND 


«77 


influences  determining  an  individual  price.  The  pike 
level  is  determined  by  a  comparatively  simple  mechanism, 
that  of  the  equation  of  exchange.  It  is  the  result  of  the 
quantity  of  money  and  deposits,  the  velocities  of  their  cir- 
culation, and  the  volume  of  trade.  The  general  price 
level  then  helps  to  fix  individual  prices,  although  not  in- 
terfaing  with  rdative  variations  among  them,  just  as  the 
feneral  level  of  the  ocean  helps  fix  the  level  of  individual 
waves  and  troughs  without  interfering  with  variations  among 
them.  The  tides  determine  whether  a  wave  shall  be  as 
a  whole  high  or  low,  and  so  the  general  level  of  prices,  while 
it  does  not  fully  fix  the  price  of  sugar,  detemdnet  whether 
it  shall  be  in  general  high  or  low.  A  rise  in  the  general  price 
level  is  one  of  the  many  causes  raising  the  demand  and  supply 
curm  of  sugar ;  and,  reversely,  a  lall  in  that  level  is  a  cause 
lowering  those  curves. 


CHAPTER  XVI 


THE  XNTLUENCE8  BEHIND  NEICAMD 

1 1.  ladMdtnl  Dtmaad  SelMdniM  tad  CorfM 

We  have  seen  that  the  market  price  of  any  particular 
good  is  that  price  in  the  demand  and  supply  schedules  which 
will  just  "  clear  the  market."  By  this  phrase  is  meant, 
of  course,  that  the  price  will  make  supply  and  demand 
equal.  Both  the  market  price  and  the  quantity  marketed 
are  determined  by  the  intersection  <rf  the  supply  and  de- 
mand curves.  We  have  therefore  explained  how  the  market 
price  (as  well  as  quantity  marketed)  of  any  particular  good 
is  fixed  by  supply  and  demand. 

But  supply  and  demand  are  not  the  ultimate  influences 
determining  prices.  They  are  only  the  proximate  influ- 
ences. Beneath  and  behind  them  lie  influences  more  re- 
mote and  more  fundamental.  In  this  chapter  we  shall 
trace  back  these  influences  so  far  as  Hbsy  have  to  do  with 
the  demand  side  of  the  market.  We  shall  find  (i)  that 
the  demand  schedule  explained  in  the  last  chapter  is  formed 
out  of  a  large  number  of  individual  demand  chedules,  and 
(2)  that  each  individual  demand  schedule  is  in  turn  fonned 
out  of  two  "  desirability  "  schedules. 

In  the  first  place,  then,  what  we  have  called  the  demand 
schedule  is  only  an  aggregate  demand  schedule.  It  is  for 
the  whole  market,  and  resolvable  into  coiistituent  demand 
schedules,  one  for  each  particular  person  in  the  market. 
The  total  demand  at  any  price  is  merely  the  sum  of  the  ir -di- 
vidual demands  at  that  price.  For  instance,  let  the  follow- 
ing table  represent  the  demand  schedules  far  cod  of  two  in- 


IBB  OmUlNCIS  BEHIND  DBKAMD 


dividmb  distinguished  as  Individual  No.  I  and  ladividiMl 
No.  n,  at  pikat  ol  fram  txa  to  $9  per  ton: — 


DnuMD  Scaunrui 


Pud 

No.  I 
(a) 

No.n 
(») 

Tot  AX, 
(••f  ») 

tu 

o 

I 

lO 

0 

8 

e 

6 

I 

5 

9 

4 

3 

3 

4 

II 

9 

6 

14 

Thp  table  tells  us  that  at  a  price  of  $12  a  ton  Individual  No. 
I  V  ill  take  only  one  ton,  and  Individual  No.  11  will  not 
take  any:  that  at 


a  price  I  $6  a 
ton  Individual 
No.  I  will  take 
four  tons,  and  In- 
dividual No.  II 
will  take  one  ton ; 
and  so  on.  The 
last  column  gives 
the  sum  of  the 
demands  of  these 
two  individuals. 
1i  we  riiould  ex- 
tend such  a  table 
to  include  the  de- 
mands of  all  the 
individuals  in  the 
cwnmunity,  we  would  obtain  in  the  last  column  the  total 
demand  in  the  community.  The  total  demand  schedule 
is  thus  merely  the  sum  of  the  individual  demaad  adwdnka 


Y\ 

T 

< 
4 
9 
t 
1 

\ 

s 

y 

s 

7  0  0IOM  JtSM 

Fio.  301 


s8o  BumnAiY  niMcinif  or  icoiioinci  |qm».xvi 


found  by  adding  together  all  the  individttal  tmounts  de- 
manded at  any  given  price.  Behind  the  total  demand 
schedule,  therefore,  are  a  number  of  omstitucnt  danand 
schedules. 

The  same  rdaticm,  of  course,  holds  between  total  and 

individual  demand  curves.  In  Figure  30  let  the  curve  didi' 
represent  the  demand  curve  for  Individual  No.  I,  and  didt' 
the  demand  curve  for  Individiud  No.  II.  At  a  given 
price,  rqn'esented  by  the  vertical  distance  or  "  latitude," 
Oy^  the  demand!  of  these  two  individuals  are  represented 

respectively  by  the  horizon- 
tal distances  or   "  longi- 
tudes,"  ydi  and  ydt.  The 
/       sum  of  these  two  demands 
/        is  represented  by  the  longer 
^         horizontal  distance,  yD. 
*  Thus  we  add  the  fongitudes 

of  the  two  individual  de- 
^  O*  mand  curves  together  to  get 
the  longitude  of  the  com- 
— ^  lined  curve  DV.  U,  in- 
stead  of  two  individual  de- 
mand curves,  we  should  have 
all  the  demand  curves  in  the  market,  and  should  add  together 
the  fongitudes  corresponding  to  givoi  ktitudes,  i^.,  ibe  de- 
mands corresponding  to  given  prices,  we  should  tiiereby 
obtain  the  total  demand  curve  of  the  market. 

We  may  pause  here  to  note  the  fact  that,  ordinarily,  any 
one  individual  plays  so  small  a  part  in  the  demand  for  any 
commodity  that  he  regards  the  price  as  beyond  the  influence 
of  any  act  of  his.  He  finds  this  price  ready  made  in  the 
market  and  adjusts  his  demand  to  it.  To  him  the  price  is 
a  fixed  fact  and  entirely  beyond  his  omtrol,  whfle  his  de- 
mand, the  quantity  he  chooses  to  take  at  that  price,  is 
the  only  thing  which  he  can  adjust.  It  is  of  course  true 
that  each  individual,  however  insigniticant  his  demand, 


Sic.  j1  TSE  ZN7LUXNCE8  BEHXNO  OEMAMD  38 1 

has  theoretically  an  influence  upon  the  general  price,  but 
the  influence  is  so  small  as  to  be  practically  negligible.  While, 
for  the  nuurket  as  a  whole,  price  is  effect  and  not  cause,  yet 
(or  the  individual  It  it  ouiie  rather  than  effect. 

To  show  more  clearly  these  relations  to  the  individual 
and  to  the  total,  we  have  drawn  in  Figure  31  an  individual 
demand  curve  dd',  the  total  demand  curve  DD',  and  the 
total  supply  curve  SS*.  The  intersection  of  the  last  two 
determines  the  market  price  PX  (or  0P\  or  px) ;  and  this 
price  determines  for  the  individual  the  amoimt,  P'p  (or  Ox), 
which  he  will  take  at  that  price. 

fa.  PeiinibilHy 

We  have  now  found  that  back  of  the  demand  curve  or 
schedule  in  any  market  lie  the  individual  demand  curvet 

or  schedules  of  all  the  people  who  compose  that  market. 
The  next  step  is  to  find  what  causes  lie  back  of  the  indi- 
vidual demand  curves  or  schedules.  Taking,  for  instance, 
the  demand  curve  ot  Individual  No.  I,  we  may  ask :  What 
are  the  conditions  which  determine  its  shape  and  size? 
The  answer  is  hat  it  depends  upon  the  desires  or  "  wants  " 
of  Individual  No.  I.  It  is  true  that  a  man  may  have  a 
strong  desin  lor  something  without  having  any  dmand  tct 
it  in  the  economic  sense.  But  this  is  simply  because  he 
desires  still  more  the  money  he  would  have  to  spend  for  it. 
Every  purchaser  of  goods  balances  two  desires,  the  desire 
for  the  goods  and  the  derire  for  the  mcrney  they  would  cost. 
On  the  relative  strength  of  these  desires  depends  the  price 
he  is  willing  to  pay.  We  have,  therefore,  to  investigate 
these  two  dedres,  the  one  for  goods,  the  other  for  money. 
We  shall  begin  with  the  desire  for  the  goods. 

Desire  for  goods  implies  desirability  in  those  goods.  The 
term  "  desirability  "  is  synonymous  with  what  is  usually 
called  "  utility  "  in  textbooks.  "  Desirability  "  is  preferred 
here  as  a  bettor  iam  to  ex|ffeaa  the  idea  intended.  li  there 


282      ELEMENTARY  PKINCIPLES  OF  ECONOMICS    [Cbap.  XVI 

exists  a  keen  desire  to  purchase  a  certain  piece  of  land,  we 
say  that  the  land  is  especially  desirable  or  has  great  desir- 
ability Likewise  precious  stones  have  great  desirability 
to  many  people.  Tobacco  has  great  desirability  to  a  smoker ; 
silks  and  satins  to  ladies  of  fashion ;  books  to  scholars ;  and 
80  on.  The  concept  "desirability"  is  so  important  that  it 
ought  to  be  defined  with  great  care.  The  desirability  of 
any  particular  good,  at  any  particular  time,  to  any  partic- 
ular individual,  under  any  particular  conditions,  is  the 
strength  or  intensity  of  his  desire  for  that  good  at  that  time 
and  under  those  conditions.  The  desirability  of  any  good  is 
one  of  the  most  important  factors  in  determining  its  price. 

The  connection,  however,  between  desirability  and  price 
was  for  a  long  time  overlooked  because  of  the  puzzling  fact 
that  many  of  the  most  desirable  articles  are  the  cheapest,  and 
many  of  the  least  desirable  are  the  dearest.  Thus  water  is 
so  desirable  as  to  be  indispensable ;  yet  there  are  few  things 
which  are  cheaper.  On  the  other  hand,  jewelrj',  which  could 
easily  be  dispensed  with,  bears  high  prices.  This  paradox, 
,  however,  is  easily  explained.  While  it  is  true  that  water  as 
j  a  whole  is  very  desirable,  the  desirability  of  any  one  quart 
of  water,  to  be  added  to  or  taken  away  from  the  whole 
amount,  is  negligible.  This  one  quart  could  make  little  dif- 
ference to  anybody  because  there  are  so  many  other  quarts 
which  could  take  its  place.  Were  any  one  quart  of  water 
indispensable,  water  would  bear  a  high  price.  On  the  other 
hand,  while  all  the  jewels  of  the  world  could  be  more  easily 
dispensed  with  than  all  the  water,  yet  any  one  jewel  is 
more  desired  than  any  one  quart  of  water.  The  desira- 
bility of  any  one  diamond,  to  be  added  to  or  taken  away 
from  the  few  which  the  owner  possesses,  is  very  great. 
Jewds  are  rare,  and  one  jewel  more  or  less  may  make  a 
great  deal  of  difference.  It  is  the  desirability  of  any  one 
unit  of  water  or  of  jewelry  which  influences  its  price  and 
not  the  desirability  of  all  the  water  in  our  possession  or  of 
all  the  jewelry. 


Sicsl  THE  INFLUENCES  BEHIND  DEMAND  283 

Wc  see,  then,  that  the  derirability  of  water  or  of  any 
ot"A!*r  sort  of  good  may  mean  either  (i)  the  desirability  of 
the  whoit;  or  (2)  the  desirability  of  one  unit  more  or  less. 
The  desirability  of  the  whole  is  called  the  total  desirability; 
the  desirab  lity  of  one  unit  more  or  less  is  called  the  mar- 
ginal d.  sirabiUty.  The  marginal  desirability  of  any  good  is 
the  desirability  of  one  unit  more  or  less  of  it.  In  economic 
science  we  have  more  to  do  with  marginal  than  with  total 
desirability,  and  it  is  therefore  important  that  the  concept 
of  marginal  desirability  should  be  thoroughly  understood. 

§  3.  Illustration 

To  illustrate  in  detail  the  distinction  between  total  and 
marginal  desirability,  let  us  suppose  a  person  wishing  to  fur- 
nish his  house  with  chairs.  As  (M^suinably  he  does  not  widi 
to  sit  or  compel  his  friends  to  sit  on  the  floor,  it  is  extremely 
desirable  that  he  should  have  some  chairs ;  but  each  succes- 
sive chair  that  he  introduces  will  lessen  the  need  for  more. 
One  chair  is  so  highly  desirable  as  to  be  almost  indiq)ai- 
sable.  It  provides  a  seat  for  at  least  one  person.  A  second 
chair,  though  not  quite  so  indispensable  as  the  first,  is  also 
extremely  desirable,  as  it  is  likely  that  he  will  often  wish 
seating  capacity  for  at  least  two.  A  third  diair,  though 
less  ui^;aitly  neeaed  than  the  second,  will  be  highly  desir- 
able; and  so  on  —  each  successive  chair  having  a  lower 
desirabihty  than  the  preceding.  The  number  of  chairs 
which  he  will  buy  will  depend,  among  other  things,  upon 
their  price.  To  fix  our  ideas,  let  us  suppose  that  he  decides 
to  buy  ten.  Then  the  tenth  chair  is  called  the  marginal 
chair  of  the  ten,  and  its  desirability  is  called  the  marginal 
desirability  of  the  ten.  It  is  this  tenth  or  marginal  diair 
wliidi  gives  him  the  most  concern  when  he  attempts  to 
decide  how  many  to  buy.  He  has  no  diflSculty,  for  instance, 
in  deciding  that  he  does  not  want  thirty  or  forty  chairs ;  the 
question  which  requires  careful  onundaratirai  in  hu  mind 


284      £L£M£NTAKY  PSINCIPLES  OP  XOONOiaCS  [CBAP.3CVI 

is  whether  he  shall  stop  buying  at  the  tenth  chair  or  at  a 
slightly  earlier  or  later  point.  He  will  consider  carefully 
what  difference  it  will  mak«^  whether  he  has  :iine  chairs  or 
ten,  or  what  difference  it  will  make  whether  he  has  ten  or 
eleven.  If  he  decides  on  ten  rather  than  nine,  it  is  because 
he  thinks  the  tenth  chair  will  make  enough  difference  to  him 
to  be  vmth  the  price  he  pays,  and  if  he  decides  against  the 
deventh  chair,  it  will  be  because  he  thinks  this  will  not  make 
enough  difference  to  compensate  him  for  the  price.  For 
instance,  let  us  suppose  that  the  price  of  the  chairs  is  $10 
each ;  then  the  fact  that  he  decides  to  take  the  tenth  chair 
shows  that  this  tenth  chair  has  at  least  $10  worth  of  desira- 
bility, while  the  fact  that  he  decides  against  the  deventh 
chair  shows  that  this  eleventh  chair  does  not  have  as  much 
as  $io  worth  of  desirability.  Practically  money  is  used  in 
just  this  way  to  measure  the  comparative  desirabilities  of 
various  goods. 

As  has  been  stated,  the  last  or  tenth  chair  bought  is  called 
the  marginal  chair  of  the  ten,  and  the  desirability  of  this 
last  or  tenth  chair  is  called  the  marginal  desirability  of  the 
ten  chairs.  The  total  desirability,  on  the  othor  hand,  of  the 
ten  chairs  is  evidently  quite  another  matter.  This  is  not 
10  X  $10.  It  is  the  sum  of  the  desirabilities  of  the  first 
chair,  second,  third,  etc.,  considered,  as  above,  in  succession 
up  to  the  tenth.  The  householder  will  not  ordinarily  be 
as  definitely  aware  of  total  desirability  as  he  is  of  marginal 
desirability.  As  we  have  seen,  he  will,  in  order  to  decide 
how  many  chairs  to  buy,  have  to  give  careful  attention 
to  the  desirability  of  the  tenth  chair;  it  b  so  easy  to 
decide  upon  the  first  few  chairs  that  he  will  not  ordinarily 
stop  to  reckon  exactly  how  desirable  the  ten  chairs  as  a 
whole  may  be.  Should  he  wish  to  reckon  this  desirability, 
he  would  do  so  by  thinking  how  much  difference  it  makes 
to  him  whether  he  has  ten  chairs  or  none  at  all.  For 
instance,  he  might  think  that  to  have  ten  chairs  rather 
than  none  at  all  is  worth  about  $150  to  him.  Then  $150 


Sk.31  fBM  nmUIMCES  BEHDiD  DSKAND  285 

would  measure  the  total  desirability  of  the  ten  diaiis,  iddle 
the  marginal  desirability,  that  is,  the  desirability  of  the  last 
-  tenth  chair,  is  only  about  $10.  From  what  has  been  said 
it  will  be  evident  that  the  total  desirability  is  of  only  theo- 
retical importance,  while  marginal  desirability  b  of  great 
practiod  importance.  It  is  of  little  practical  importance  to 
any  purchaser  to  know  how  much  is  the  total  desirability  of 
the  chairs  he  owns ;  namely,  how  great  is  the  difference  in 
comfort  and  convenience  between  having  the  number  of 
chairs  which  he  actually  does  have  and  having  none  at  all. 
He  finds  it  diflBcult  to  imagine  how  it  would  seem  to  have 
none  at  all.  Such  a  condition  can  be  considered  only  hypo- 
thetically.  It  never  enters  into  his  calculations  as  a  practi- 
cal possibility. 

On  the  other  hand,  marginal  desirability  enters  daily 
into  practical  life.  The  question  which  every  purchaser  of 
goods  asks  himself  is  where  to  stop — where  to  draw  the  line 
m  margin  beyond  which  he  will  not  buy.  He  has  to  fix  a 
margin  in  every  purchase,  and  in  fixing  it  he  has  to  settle 
the  question  whether  one  unit  more  or  less  is  or  is  not  as 
desirable  as  the  money  which  he  will  have  to  pay  for  it. 
In  other  words,  with  the  desirability  of  this  unit  he  has  to 
compare  the  desirability  of  the  money  which  it  will  cost. 
He  can  only  solve  the  question  of  how  much  to  buy  by 
wdghing  carefully  in  his  mind  the  desirability  of  the  last 
few  units,  balancing  rach  against  the  desirability  of  the 
money  which  it  costs.  At  last  he  decides  to  limit  his 
purchase  at  a  certain  point  beyond  which  the  next  unit 
would  not  be  worth  to  him  what  it  would  cost.  The  pre- 
ceding unit— the  last  whidi  he  decides  to  buy— is  ad- 
judged as  bardy  worth  its  cost,  affording,  perhaps,  a  slight 
advantage  or  surplus  desirability.  On  the  unit  next  pre- 
ceding, the  advantage  or  surplus  desirability  is  greater  and 
•ooabftckmrd;  but  the  further  ba<^  we  fo  the  Icm  can* 


386     BUOIBNXAXy  PUMOPUS  09  lOONOmCS  ICbav.XVI 


§  4*  SooM  RttDUfki  oil  DwiyaMli^ 

The  total  quantity  of  goods  whose  marginal  desirability 
is  tinder  conad»ation  may  be  any  specified  quantity  of 
goods  whatever.  It  may  be  a  specified  quantity  of  goods 
now  existing,  or  a  specified  quantity  of  goods  in  the  future, 
or  a  specified  flow  of  goods  through  a  period  of  time.  For 
instance,  by  the  margins!  desirability  of  coal  to  an  individ- 
ual may  be  meant  the  marginal  desirability  of  the  particular 
stock  of  coal  in  his  bin  at  the  present  moment.  If  this  stock 
consists  of  fifteen  tons,  its  marginal  desirability  is  the 
desirability  of  the  fifteenth  ton,  or  the  difference  to  him 
between  the  desirability  of  having  fifteen  and  of  having 
fourteen  tons.  Again,  if  a  person  is  consuming  in  his  house- 
hold fifteen  tons  of  coal  a  year,  its  marginal  desirability 
at  any  time  is  the  desirability  of  the  fifteenth  ton,  or  the 
sacrifice  which,  in  his  estimation  at  that  time,  would  be 
occasioned  were  he  to  reduce  his  yearly  consumption  from 
fifteen  tons  to  fourteen.  A  stock  of  fifteen  tons  and  a  con- 
sumption of  fifteen  tons  a  year  are  evidently  quite  distinct. 
It  is,  therefore,  necessary  in  each  case  to  specify  the  particu- 
lar quantity  of  goods  referred  to,  whether  it  be  a  stock  in 
the  present  or  a  stock  in  the  future  or  a  flow  through  a 
period  of  tune. 

Uttdesirability  is  the  oi^x>site  of  desirability.  Often  we 
may  express  the  very  same  fact  by  either  word.  For 
instance,  it  does  not  matter  whether  we  speak  of  the 
desirability  of  keeping  money,  or  the  undesirability  of 
losing  it. 

One  of  the  most  important  general  facts  in  regard  to 
marginal  desirability  is  that  an  increase  in  the  quantity  of 
goods  whose  marginal  desirability  is  under  consideration 
results  in  a  decrease  in  the  marginal  desirability.  This  we 
have  noted  in  the  case  of  the  chairs.  Each  unit  in  tdditKMi 
is  less  desirable  than  the  preceding  unit. 


Sicsl  THE  INFLUENCES  BEHIND  DEICAMD  287 


Margiiul  desirsUHty  is,  as  we  have  seen,  often  txpnutd 

as  the  desirability  of  the  "  last "  unit.  But  this  word 
"  last "  is  used  metaphorically  and  not  in  any  literal  sense 
of  sequence  in  time.  All  of  the  supposed  ten  chairs  may 
be  bought  at  the  very  same  instant.  The  desirability  of  the 
tenth  chair  simply  means  the  difference  in  desirability  be- 
tween having  ten  chairs  and  having  only  nine.  Any  one 
of  the  ten  chairs  may  be  considered  as  the  tenth. 

A  special  and  important  instance  of  marginal  desira- 
bility is  the  marginal  desirabiUty  of  money.  The  marginal 
desirability  of  money  at  any  particular  time,  to  any  par- 
ticular individual,  under  any  particular  conditions,  has  the 
same  sort  of  meaning  as  the  marginal  desirability  of  auy 
other  good.  It  means,  therefore,  the  strength  or  intensity 
of  a  man's  desire  for  an  additional  dollar,  or,  what  amovmts 
to  the  same  thing,  his  reluctance  to  part  with  it.  Briefly, 
the  marginal  desirability  of  mon^  to  him  is  the  dedra- 
bility  of  a  dollar  to  him.  Whenever  he  thinks  of  making 
a  purchase,  this  desire  comes  into  play,  and  the  question 
of  whether  or  not  to  buy  is,  as  implied  in  the  preceding 
discussion,  determined  by  his  judgmoit  as  to  whethor  or 
not  the  marginal  desirability  of  the  goods  exceeds  the  mar- 
ginal desirability  of  money  multiplied  by  the  price  in  money 
required  to  secure  those  goods. 

§  5.  Lidifidiial  Demands  deiivvd  bom  Maigiiial 
Desirabilities 

It  is  on  sudi  comparison  of  the  marginal  desirabilities 

of  goods  and  money  that  the  demand  curve  of  each  individ- 
ual depends.  We  shall  now  illustrate  in  detail  how  demand 
depends  on  desirability  by  taking  the  desires  and  demand 
of  a  ffvea  individual  (whom  we  shall  call  No.  I)  for  a  given 
good  (such  as  coal).  As  in  the  case  of  the  chairs,  the  price 
Individual  No.  I  is  willing  to  pay  is  simply  the  ratio  between 
two  mar^ual  desirabilities,  that  of  coal  and  that  of  money. 


a88      EUaiENTASY  PSINCIFLE8  OF  EOONOiliCS    [CbA».  XVI 


We  are  to  find  how  each  individual  demand  schedule,  as 
given  in  §  I,  depends  upon  two  antecedent  schedules  of 
"  desirability."  If  Individual  No.  I  thinks  that  one  ton  of 
coal  is  a  dozen  times  as  desirable  to  him  as  a  dollar,  he 
will  evidently  be  willing  to  pay  any  price  up  to  $12  for  that 
ton.  If  the  price  is  over  $12,  he  will  not  buy  even  a  ton 
of  coal.  If  it  hjust  $12,  he  is  willing  to  buy  just  one  ton. 
A  second  ton  will  be  worth  less,  in  his  estimation,  being,  let 
us  say,  only  ten  times  as  desirable  as  a  dollar.  He  will 
then  be  willing  to  pay  up  to  $io  for  thfa  second  ton.  If, 
then,  the  price  is  $10,  he  will  buy  up  to  two  tons ;  for  at 
that  price  it  will  evidently  be  more  than  worth  his  while 
to  buy  the  first  ton  and  just  worth  his  while  to  buy  the 
second.  If  the  desirability  of  a  third  ton  is  dght  times 
the  desirability  of  a  dollar,  he  will  be  willing  to  pay  up  to 
$  8  per  ton  for  three  tons ;  for  at  that  price  the  first  and 
second  tons  are  more  desirable  than  the  money,  and  the 
third,  just  as  desirable.  If  the  desirability  of  the  fourth 
ton  is  six  times  that  of  a  dollar,  he  is  wilUng  to  pay  a 
price  up  to  $  6  per  ton  for  fom:  tons.* 

*  Be  will  stop  buying  at  that  point  at  which  the  last  unit  bought  has 
•ligfatly  more  desirability  than  the  money  it  costs,  and  the  next  unit  (left 
nnbought)  has  slightly  less  desirability  than  the  money  it  costs.  Thus,  if 
the  price  of  coal  is  $5.50  per  ton,  he  will  buy  four  tons  because  the  fourth 
ton  is  slightly  more  desirable  than  $5.50  (being,  according  to  the  figuies 
supposed  above,  as  desiraUe  as  $6.00)  white  the  fifth  ton  is  sli^tly  fcsa 
desiialde  than  $5.50  (bebg  only  as  desirabte  as  I5.00).  In  the  case  of 
most  purchases,  the  desirability  of  the  last  of  the  units  bought  and  that 
of  the  first  of  those  unbought  differ  so  slightly  that  we  may  call  either  of 
them  tl  e  marginal  desirability.  That  is  why  we  have  spoken  of  marginal 
desirability  as  the  desirability  of  one  unit  more  or  less.  Strictly  speaking, 
however,  the  margin  lies  hetwwn  the  last  of  the  units  bought  and  the  first 
of  those  unbought,  and  the  marginal  deairabiUty  may  be  called  a  mean  of 
the  dedral^ties  of  these  two  units  rather  than  the  desirability  of  ehher. 
In  mm  cases  the  (karabiHty  of  the  last  unit  bought  and  the  next  unit 
(firrt  unbought)  are  widely  different.  This  is  true  when  the  units  are  large 
and  are  not  subdivisible  into  smaller  units.  For  instance,  pianci  are  large 
ui!  :s  and  not  subdivisible.  One  tannot  buy  one  anti  a  half  pianos,  but 
must  choose  between  buying  one  and  buying  two.  Only  one  piano  is 
'sually  bought  by  a  family.  A  second  friuio  would  have  littk  or  no  desir»- 


Sk.  si  THE  nmUXNOBS  BEHIND  DEMAND  389 


In  each  case  the  highest  price  he  is  wUling  to  pay  for  a  given 
quantity  is  measured  by  the  ratio  of  the  destrabUity  of  the  last 
ton  to  the  desirability  of  a  dollar.  The  consequent  deriva- 
tion of  prices  from  desirabilities  is  summarized  in  the  fcd- 
lowing  table :  — 


Tom  Powsubd 

DEsntABiLiTY  or 
Last  Ton 
puxcbaseo 

(«) 

DtsiBABiuTy  or 
A  Dcnjus 

(») 

Pkics  fkr  Ton  tbx 
customek  would 

BS  WIUINO  TO  PaTT 
(•  +  ») 

I 

13 

1X3 

3 

ZD 

zo 

3 

8 

8 

4 

6 

6 

S 

5 

5 

6 

4 

4 

As  indicated,  the  last  column  is  foimd  by  taking  the  ratio 
of  the  figures  in  the  second  to  those  in  the  third ;  that  is, 
dividing  (a)  by  (b).  As  there  are  no  standard  units  of 
desirability,  it  w;ll  not  matter  what  unit  we  select.  In  the 
table,  for  simplicity  of  division,  we  have  taken  as  our  unit 
for  measuring  desirability  the  marginal  desirability  of  money 
to  Individual  No.  I  himself.  We  thus  derive  the  individ- 
ual's demand  schedule  from  his  schedule  of  desiraUHtles. 
The  resulting  demand  schedule  is  the  fourth  column  con- 
sidered with  lespect  to  the  first  column.  It  tells  us  the 
highest  prices  (column  4)  Individual  No.  I  is  wilfing  to 
pay  for  stated  quantities  of  coal  (cdumn  i),  or,  what 
amounts  to  the  same  thing,  the  largest  quantities  of  coal 
he  is  willing  to  take  at  stated  prices.  As  shown  in  the 

bOity.  In  this  case  Uie  difierenoe  between  the  desirability  of  the  piano 
whidi  is  bought  and  that  of  the  aatt  whidi  is  not  bought,  is  vezy  gmt 
Hie  famibr  might  be  wiDiiw  to  ^  f  som^  if  sMd  be,  to  git  mm  pins 
Ixtt  ooljr  tie  to  fBt  ft  iMoad. 

V 


•90     SLXMENTAKY  PUNCIPLK8  OF  K00N0MIC8  iCkAr.XVI 


preceding  chapter,  it  does  not  matter  which  wa*'  the  rela- 
tion b  expressed. 

In  the  preceding  table  the  numbers  expressing  desirabil- 
ities of  coal  and  those  expressing  price  are  the  same,  be- 
cause we  arbitrarily  represented  the  desirability  of  a  dollar 
by  "  I  " ;  we  tooi;  the  marginal  dedrabiUty  of  money  as 
our  unit  of  desirability.  In  this  case  we  may  say  that  the 
marginal  desirability  of  any  point  in  the  table  is  measured 
numerically  by  the  money  the  individual  is  willing  to  pay 
for  the  marginal  unit  at  that  point.  But  imagine  another 
individual  (No.  11)  —  an  individual  who  has  precisely  the 
same  intensities  of  desire  as  No.  I  for  coal,  but  who,  on 
account  of  relative  poverty,  prizes  each  dollar  twice  as 
much  as  does  Individual  No.L  In  comparing  the  two 
men,  we  shall  have  to  use  the  same  unit  of  desirability, 
viz.,  the  marginal  desirability  of  money  to  Individual  No.  I. 
For  Individual  No.  II  the  desirability  of  money  is,  there- 
fore, two  such  units.  The  result  is  the  following  table  for 
Individual  No.  11 :  — 


Tom  Pdkxabd 

DxSQtABILITY  OT 

Each  SucuxsnvB 
Tarn 
(•) 

DKrniABnJTT  ov 
A  VOUM 

Puce  pek  Ton  the 

CuSTOldK  WOULD 

BB  muaro  to  Pat 
(•  +  ») 

z 

la 

2 

16 

a 

to 

a 

5 

3 

8 

a 

4 

4 

6 

a 

3 

5 

S 

a 

9.S0 

6 

4 

  .  . , 

a 

3 

The  first  ton  has  a  desirability  of  12  units  just  as  did  the 
first  ton  for  Individual  No.  I,  but  the  desirability  of  a  dollar 
to  Individual  No.  II  is  twice  as  great  as  the  desirability  of 
a  dollar  to  Individual  No.  I.  Hence  the  first  ton,  instead 
of  being  twelve  times  as  desirable  as  a  dollar,  is  only  six 


tac  si        m  nnLuxMcn  BnaMD  dwmmud  391 

times  as  desirable.  Therefore  he  is  willing  to  pay  only  up 
to  $6  for  it.  Just  as  in  the  case  ot  Individual  No.  I,  the 

prices  in  the  last  column  are  foimd  by  dividing  the  figures 
in  the  second  column  by  those  in  the  third.  In  this  case, 
however,  the  figures  in  the  last  column  are  not  identical  with 
those  in  the  secoad  odumn,  but  are  only  half  as  great. 
And  in  general  the  higher  the  marginal  desirability  of  money, 
the  lower  the  schedule  of  prices  which  buyers  are  willing  to 
give. 

We  see,  then,  that  the  two  individuals,  though  tiiey  have 

precisely  the  same  intensities  of  desire  for  coal,  have  very 
different  demands  for  coal.  If  the  price  of  coal  is  $5  a  ion. 
Individual  No.  I  will  buy  up  to  the  fifth  ton ;  for  when  he 
reaches  the  fifth  ton,  and  not  bef<Mre,  the  marginal  desirability 
of  coal  (5)  to  him  will  be  just  five  times  that  of  a  dollar  (i). 
But  at  this  same  price  of  $5,  Individual  No.  II  will  buy  only 
up  to  two  tons ;  for  in  his  case  the  second  ton  is  the  point 
at  which  the  marginal  desirability  of  coal  (10)  is  five  times 
the  marginal  desirability  of  a  dollar  (2).  This  contrast 
interprets  the  fact  that  the  poor  "  cannot  afford  "  to  buy 
as  much  as  the  rich.  The  poor,  like  Individual  No.  II, 
have  a  rdatively  hi^  marginal  desirability  of  money. 

It  is  easy  to  express  these  same  relations  by  curves.  A 
demand  curve  is,  as  we  know,  merely  a  graphic  picture 
of  a  demand  schedule.  We  may  likewise  draw  desirability 
curves  as  graphic  pictures  of  dMirabiUty  schedules.  And 
just  as  the  demand  schedule  is  derived  by  simple  division 
from  desirability  schedules,  so  is  the  demand  curve  derived 
by  simple  division  from  desirability  curves. 

In  Figure  33  the  curve  dif  is  the  <k8iral^ty  curve  ot  coal 
for  Individual  No.  I ;  that  is,  it  represents  the  desirability 
to  him  of  each  successive  ton  of  ccal  as  given  in  the  pre- 
ceding table.  Thus  the  latitude  or  height  (13)  oi  d  repre- 
sents the  desirability  ci  the  first  ton.  The  height  (10)  of 
the  next  point  to  the  right  represents  the  desirability  of 
the  seomd  ton ;  and  so  on  to  d',  the  height  of  which  (5) 


S93    BuniBNTAiy  nuMcapuM  or  looNoiacs  \pm».m 


V, 
6 


 +^Tf 

I 


d' 


Ito.  St. 


represents  the  desirability  of  the  fifth  ton.  The  desira- 
bility of  the  fifth  ton  is,  as  we  know,  the  "  marginal  dcilrap 

bility"  of  five  tons,  the 
desirability  of  the  fourth, 
the  marginal  desirability  of 
four  tons,  etc.  That  is,  the 
latitude  or  height  of  each 
of  the  points  from  d  to  d' 
represents  the  marginal  de- 
sirabiHty  of  the  amount  of 
coal  corresponding  to  the 
longitude  of  that  point. 
The  heights  of  the  points 
wbkh  form  a  horixontal 
row  one  unit  above  the 
base  represent  the  marginal 
desirability  of  money. 
From  the  heij^tsof  these  two  sets  of  points — theupper  ones 
represent!!^  the  marginal  desirability  of  coal  and  the  lower 
ones  representing  the  .marginal  desirability  of  money  — 
by  simple  division  of  the  numbers  indicated,  we  derive  the 
heights  of  the  set  of  points  constituting  the  demand  curve 
for  Individual  No.  I.  As  the  divisor  is  in  this  case  imity, 
the  demand  curve  so  derived  will  coincide  with  the  crve 
dd'.  Hence  dd'  will  serve  not  only  as  the  desirability  curve 
for  coal  for  Individual  No.  I,  but  also  as  the  demand 
curve  for  Bidividual  No.  I. 

Figure  33  represents  the  corresponding  curves  for  In- 
dividual No.  II,  for  whom,  by  hypothesis,  there  are  precisely 
the  same  marginal  desirabilities  oi  coal,  but  for  whom  the 
marginal  desirability  of  mcmey  is  twice  as  great.  The 
upper  points,  r  to  r ',  represent  the  marginal  desirability  of 
coal,  and  are  at  the  same  heights  as  the  upper  points  d  to 
<f'  in  Figure  32.  The  low«r  p<Aite  in  Figure  33,  however, 
are  now  two  units  high  instead  of  one.  Hence,  vrhen.  we 
divide  the  numbers  12,  etc,  for  n'  by  the  number  a,  we 


Sac  A 


m  IMfLUIMCBI  BBDHD  DSKAMD 


lO 


5  ' 


-  ■•m" 


shall  get  as  our  demand  curve  a  curve  dd',  which,  xinlike 
the  dbr  md  curve  for  Indi\1diitl  No.  I,  will  not  ooindde 

with  rr',  but  will  be  everywhere  only  half  as  high. 

We  see,  then,  how  to  derive  an  individual  demand  sched- 
ule (or  curve)  by  dividing,  so  to  speak,  one  desirability 
schedule  (or  curve)  by  an- 
other. The  resulting  de- 
mand schedule  (or  curve)  of  12 
coal  will  coincide  with  the 
sdiedule  (or  curve)  of  mar- 
ginal desirability  of  coal  if 
the  marginal  desirability  of 
money  be  taken  as  unity. 
Otherwise  the  demand 

schedule  (or  curve)  will  have  *  - 

its  figures  all  standing  in  a 
given  ratio  to  those  of  the 
schedule  (or  curve)  of  mar- 
ginal desiraUlity  of  coal.  fm.  » 
In  either  case  the  demand 

curve  is,  or  is  equal  to,  a  desirability  curve  translated  into 
tons  cS  m<»e>. 

This  is  all  true  on  the  assumption  that  the  marginal 
desirability  of  money  for  each  individual  remains  constant, 
as  represented  in  our  tables  or  curves,  being  always  unity  for 
Individual  No.  I  and  always  2  for  Individual  No.  II.  In 
other  words,  we  have  assumed  that  the  marginal  desirability 
of  money  is  not  appreciably  affected  by  a  large  or  small  pur- 
chase of  coal.  Of  course,  a  purchase  might  be  made  so  large 
and  at  so  h^  8  price  that  the  nuuginal  desirabiHty  of  mon^ 
would  be  appreciably  affected.  Theoretically,  the  marginal 
desirability  of  money  increases  with  every  expenditure; 
the  less  money  there  is  left,  the  more  precious  it  becomes. 
But  thoe  axe  so  many  ways  to  f^end  money,  ami  the  ez- 
penditure  on  any  one  thing,  such  as  coal,  requires  ordinarily 
so  small  a  drain  on  the  total  power  to  Mpend,  that  the 


994    mDnmutY  nuiGVui  ot  ■rxmomci  ioukZvi 

marginal  dednbflity  of  money  ii  not  very  different  whether 
a  man  buys  no  coal  at  all  or  all  the  coal  he  can  tSad. 

Consequently  in  considering  the  purchase  of  any  particular 
good,  the  desirability  of  a  dollar  may  be  regarded  as  prac- 
tically a  constant  quantity,  represented,  as  in  Figures  33 
and  33,  by  the  heights  of  a  horizontal  row  of  pointo. 

In  the  last  chapter  we  considered  the  price  of  coal  as  the 
effect  of  supply  and  demand  and  expressed  by  two  curves. 
In  this  chapter  we  have  seen  that  one  of  these  two  curves,  the 
demand  curve,  is  in  turn  the  result  of  innumerable  individ- 
ual demand  curves ;  and,  finally,  that  each  of  these  indi- 
vidual demand  ..urves  is  in  turn  the  result  of  two  desirability 
curves — one  for  coal  and  another  for  money — which  charac- 
terize the  given  individual.  These  dedraUHty  curves  are 
the  ultimate  curves  lying  back  of  demand,  and  the  demand 
curve  is,  as  it  were,  a  desirability  curve  translated  into 
terms  td  moo^. 

§  6.  MtHtta  of  Mtttet  Mm  to  Mrafeatty 

We  are  now  ready  to  see  clearly  that  the  market  pda 
of  coal  is  equal  to  the  ratio  between  two  intendties  of 

desire  in  the  mind  of  each  purchaser  —  the  ratio  of  the 
marginal  desirability  of  coal  to  that  of  money.  No  indi- 
vidual demander  of  coal  can,  of  course,  determine  the 
market  price  of  coal.  On  the  contrary,  to  him  the  maiket 
price  seems  to  be  fixed,  and  all  that  he  can  do  is  to  adjust 
his  purchase  to  it.  But  this  adjustment,  when  practiced 
by  all  the  numerous  persons  who  demand  coal,  con^ti^-tes 
the  whde  demand  side  of  the  market,  and  exerts,  there^^ie, 
"  very  powerful  influence  on  said  existing  market  price. 
.'^  -arket  price,  we  have  seen,  must  "  clear  the  market,"  and, 
applied  to  the  demand  side  of  the  market,  this  means  that 
the  market  price  must  be  such  that  nrfiai  each  fanlivfaliMl 
on  the  demand  side  adjusts  his  purchase  to  it  in  such  a 
manner  that  the  ratio  of  his  margii^al  desirability  of  coal  to 


m  nmuBNcn  bkrimd  oiiiand 


his  marginal  desir  ibility  of  money  is  equal  to  the  price,  the 
turn  total  of  all  such  purchase!*  (i.e.,  the  total  demand)  *ti«M 
equal  the  total  wapfify. 

This  principle  that  the  market  price  of  any  good  is  equal  lo 
the  ratio  between  iis  marginal  desirability  and  the  marginal 
desirability  of  money  jor  each  and  aiery  buyer  is  so  important 
that  it  wiU  be  id^ljk  to  restate  H  in  as  many  forms  as 
possible. 

Any  one  ot  the  following  statements  will  show  where  the 
stopping  point  of  each  purchaser  is:  — 

I.  Each  purchaser  bnyi  tatfl  the  ratio  of  the  marginal 
desirability  of  the  good  to  the  marginal  desirability  of 
money  is  brought  ir  •   equality  with  the  price. 

a.  Each  purcha^  ys  until  the  desirability  of  the 
mui^  unit  bectnaes  equri  to  the  Mrafaffity  of  the 
money  spent  for  this  marginal  unit. 

3.  Each  purchaser  buys  until  his  maqpmal  (of  de- 
sirability) is  reduced  to  nothing. 

4.  Each  purchaser  buys  until  he  makes  his  total  gain  (or 
surplus  desirability)  a  maximum. 

The  kst  two  may  require  further  explanation. 

Evidently  it  is  the  same  thing  to  say  that  a  purchaser 
stops  buyiag  wbm  the  desintbffity  of  the  last  ton  pur- 
chased is  equal  to  the  desirability  of  the  money  paid  for 
this  last  ton,  as  to  say  that  he  stops  buying  when  the  last 
ton  has  M  excess  of  desirability  over  the  desirability  of  the 
morny  paid  for  it. 

Let  us  examine  the  nature  <rf  the  gain  wfaidi  the  pur- 
chaser makes,  and  which  is  thus  reduced  to  zero  on  the  last 
ton.  Evidently  he  gains  no  money;  on  the  contrary,  he 
loses  it.  What  he  does  gain  is  desirabiHty.  Ws  gia  in 
desirabiUty  and  his  "  surplus  desirabihty  "  is  the  difference 
between  the  total  desirability  of  the  coal  he  buys  and  the 
total  (kriraHlity  of  the  money  he  has  to  sacrifice. 

If  the  price  is  $5  per  ton,  hi  wUch  case  Individual  No.  I, 
M  ys  adwdule  (or  cm)  afasm,  buys  5  ioM,  the  M  de. 


396      ELEMENTARY  PRINCIPLES  OP  ECX)NOiaCS    [C^.  XVI 

sirability  of  these  5  tons  to  him  is  41  units  of  desirability, 
being  the  sum  of  the  desirabilities  as  given  in  the  schedule 
(or  curve)  for  these  5  consecutive  tons,  viz.,  12  + 10  +  8  + 
6  +  5,  or  41 ;  the  sacrificed  desirability  is  the  desirability 
of  the  $25  spent,  which,  as  we  assume  that  each  dollar  has 

1  unit  of  desirability,  is  25  units ;  the  surplus  desirability  is 
the  excess  of  the  total  over  the  sacrificed  desiralnlity,  or 
41  —  25  =  16  imits. 

Now  this  gain  of  16  consists  of  diminishing  gains  on  suc- 
cessive tons.  On  the  first  ton  the  gain  is  the  diffnence  be- 
tween the  12  units  which  the  ton  is  worth  and  the  5  units 
he  must  sacrifice  to  get  it ;  this  is  1 2  —  5,  or  7  units.  Likewise 
the  gain  on  the  second  ton  is  10  —  5,  or  5  units ;  on  the  third, 
8  —  s,or  3  imits ;  on  the  fourth,  6  —  s,or  i  unit ;  and  <m  the 
fifth,  5  —  5,  or  zero.  He  stops  his  purchase  at  this  point, 
for,  if  he  should  extend  it  further,  he  would  lose  desirability. 
The  sixth  ton,  for  instance,  would  yield  only  4  imits  and 
cost  him  5,  and  the  seventh  and  later  tons  would  ca\ise 
greater  losses. 

Likewise  for  Individual  No.  II,  who  can  only  afford  to  buy 

2  tons,  the  total  desirability  of  these  two  tons  is  12  + 10, 
or  32  \uits ;  the  sacrificed  desiral^ty  is  the  desiraUlity  of 
the  $10  paid,  which,  as  each  dollar  is  supposed  to  have  3 
units  of  desirability,  is  20  units ;  and  the  surplus  desirability 
is  22  —  20,  or  2  units.  This  gain  is  all  on  the  first  ton,  as  the 
second  is  worth  only  its  cost. 

Individual  No.  I  thus  gains  more  than  Individual  No.  n, 
though  both  gain  something. 

The  last  method  of  stating  the  principle  was  that  each 
buys  so  as  to  make  the  greatest  possible  pin  in  desirability. 
Evidently,  Individual  No.  I  gets  hb  greatest  gain  by  buying 
5  tons.  His  gains  on  these  5  tons  were,  respectively,  7, 5, 3,  i, 
and  o  units,  making,  as  we  have  seen,  an  aggregate  gain  of 
16  units.  Had  he  stopped  buying  at  the  third  ton,  his  gain 
would  have  been  one  unit  less,  i.e.,  7  +  S  +  3,  oris  units. 
On  the  other  hand,  if  he  had  bought  6  tons,  he  would  have 


Sac  ''.  THE  mfLUIMCXS  BIHIMD  DEMAND  397 


lost  one  unit  on  the  fdzth  ton,  whidi  would  have  reduced 
his  gain  from  i6  to  15.    Thus  by  atappiag  at  the  fifth 

ton  he  gains  the  most  he  can. 

The  idea  of  something,  not  money,  gained  in  a  trade  is 
important  to  grasp.  By  its  aid  we  have  no  difficulty  in 
xmderstanding  that  both  parties  usually  gain  by  a  trade. 
Trade  does  not  imply  that  one  of  the  two  parties  gains  at 
the  expense  of  the  other.  This  is  true  when  one  of  the  two 
parties  cheats  the  other,  but  ordinary  trade  is  not  cheating. 
Nevertheless,  the  idea  that  only  one  party  can  gain  hy  a 
trade  is  an  old  and  persistent  one.  It  was  largely  responsible 
for  attempts  to  regulate  prices  in  the  Middle  Ages,  to  make 
the  price  "  just "  and  prevent  one  party  gaining  at  the  ex- 
pense of  the  other ;  it  was  also  largely  responsible  for  the 
sentiment  in  favor  of  encouraging  the  export  trade  and  dis- 
couraging the  import  trade, — a  practice  which  impUed  that 
a  nation  was  winning  when  it  sold  more  than  it  bouj^t, 
but  losing  when  it  bought  more  than  it  sold.  In  fact,  the 
phrases  "  favorable  balance  of  trade  "  and  "  imfavorable 
balance  of  trade,"  based  on  this  idea,  are  still  in  use,  al- 
though their  original  impUcation  of  gain  or  loss  is  gcme. 
We  now  recognize  that  the  country  parting  with  money  by 
buying  goods  from  abroad  may  gain  desirability  just  as 
the  man  who  parts  with  money  by  buying  coal  gains 
desirability. 

Those  who  were  misled  as  to  a  balance  of  foreign  trade 
being  "  favorable  "  or  "  xmfavorable  "  were  also  misled  as 
to  the  nature  of  domestic  trade.  They  convinced  them- 
selves that  trade  within  a  nation  was  of  no  consequence  to 
that  nation.  They  said  it  merdy  changed  money  and 
goods  from  one  man's  hands  to  another's  in  the  same 
coimtry,  and  therefore  could  not  increase  the  wealth  of  the 
nation  as  a  whole.  They  failed  to  see  that  every  ezdiange 
^<»rds  "  sttrpittt  desirabSity  "  to  both  parties  en^gbg  bk 
it.  Each  man  gets  the  goods  he  wants  in  preference  to 
those  he  already  has.  The  vahies  of  the  goods  ocduuged 


398      SUEMXNTAXY  PlXNCm^  OT  100H0IIIC8  [Cbaf.XVI 

are  equal  and,  as  we  saw  in  Chapter  V,  §  6,  these  vahes 

may  be  canceled  against  each  other  when  we  are  making 
up  accounts  involving  values;  but,  as  then  stated,  this 
does  not  imply  that  there  is  no  gain  of  any  kind.  We  now 
see  deaity  that  there  is  actual  gain  and  that  this  gain 
consbts  in  "  surplus  desirability." 

§  7.  Importance  of  the  Marginal  DesirabiUty  of  M<mey 

The  student  will  have  noticed  that  the  money  element 
was  present  in  all  the  stages  of  our  study,  and  is  still  present 
even  when  we  caxrr  our  analysis  down  to  each  individual 
mind.  A  halving  of  the  purchasing  power  of  money  halves 
iu,  marginal  desirability  to  each  person.  But  as  we  have 
seen  in  the  desirability  schedules  (and  curves)  of  Individuals 
I  and  II,  the  marginal  desirability  of  money  to  the  indi- 
vidual u  a  divisor  to  be  divided  into  the  marginal  desira- 
bility of  coal  to  him  in  order  to  give  the  price  the  individual 
is  willing  to  pay  for  coal.  Therefore,  to  halve  this  divisor 
for  each  individual  will  result  in  doubling  the  quotient  — 
the  price  he  is  willing  to  pay.  In  other  words,  the  prices 
in  each  individual's  demand  schedule  (or  curve)  will  all  be 
doubled  by  halving  the  purchasing  power  of  money.  Con- 
sequently the  same  is  true  of  the  total  demand  schedule 
(or  curve).  Hiis  is  mcedy  restatii^  what  has  httn  said 
before,  except  that  before  we  considered  the  demand  as  a 
whole,  whereas  now  we  trace  back  the  effects  of  a  change 
in  the  purchasing  power  of  money  to  each  individual  on 
the  donand  side  of  the  market 

We  can  now  see  more  clearly  than  in  Chapter  I  how  care- 
ful we  should  be  when  measuring  values  in  terms  of  money. 
If  our  object  is  to  compare  desirabilities,  we  must  correct 
our  maaey  oomfMurisons  for  differences  in  the  desin^tiOity  <rf 
moaey.  We  must  make  allowance  for  differences  in  the 
importance  of  a  dollar  (i)  among  different  people  according 
to  differences  in  wealth  and  needs,  and  (2)  between  different 


Sk.  a  IBB  ncn.'DXMCBS  BBHINU  OBMAIID  S99 


times  or  countries  according  to  diffovnces  in  puxdiasing 
power  of  money. 

(i)  If  a  millionaire's  wife  pays  $10,000  for  a  brooch,  while 
her  poor  neighbor  pays  |io  for  a  gown,  we  should  not  infer 
that  the  rich  woman  prizes  her  brooch  a  thousand  times  as 
much  as  the  poor  woman  prizes  her  gown.  This  would  be 
true  if  the  desirability  of  a  dollar  were  the  same  in  the  two 
cases,  but  as  it  is  likely  that  the  poorer  woman  prizes  a  dol- 
lar more  than  a  thousand  times  as  highly  as  does  the  rich«r 
woman,  it  is  altogether  probable  that  the  gown  is  of  more  im- 
portance to  the  poor  woman  than  the  brooch  is  to  the  rich  one. 

From  the  fact  that  the  richer  an  individual  is,  the  less  the 
marginal  desirability  of  money  to  him  or  her,  it  further 
follows  that  the  y~ 
difference  in  de- 
sirability of  two 
fortunes  is  much 
less  than  their 
money  values 
would  suggest.  A 
man  whose  income 
has  increased  from 
$1000  to  |io,ooo  a 
year  is  better  off 
than  when  it  was 
$1000  a  yen,  but 
he  is  not  ten  times 
better  off.  The 
extra  I9000  may 

not  be  wOTth  as  mudi  as  the  (»i|^nal  $1000,  in  wUch  caae 

he  is  not  even  twice  as  well  off.  It  is  still  truer  that  a  man 
with  a  fortune  of  $500,000,000  is  only  slightly  better  off  (if 
at  all)  than  one  with  only  $1,000,000.  Were  these  facts 
better  ^preciated,  **  ipreat  r^ics,"  though  desirable,  w<Mdd 
be  less  dazzling  to  those  who  have  never  possessed  them. 
In  Figure  34,  longitude  represents  the  hiOQme  ol  a  man. 


300      ZLKMEtlTARY  VKOKIBUtS  CS9  KCONOMICS  [CkAV.XVI 


and  latitude  represents  its  marginal  desirability  to  him. 
Hie  curve  is  purely  illustrative,  as  we  do  not  know  in 
figures  what  exact  difference  in  the  mftrginal  desirability  of 
money  is  caused  by  a  given  increase  in  a  man's  income.  It 
is  intended  merely  to  express  the  fact  that  the  marginal 
desiralnlity  of  money  (assuming  a  given  purchasing  power) 
decreases  very  rapidly  with  an  increase  in  income ;  that  is, 
the  richer  a  person,  the  less  —  and  very  much  less  —  he 
prizes  an  individual  dollar.  The  curve  probably  continues 
to  the  right  indefinitely,  though  approaching  closer  and 
doser  to  the  base ;  no  matter  how  rich  a  man  becomes,  an 
additional  dollar  will  still  have  some  desirability  in  his  eyes. 
Man  is  literally  insatiable. 

(3)  So  much  for  the  allowance  to  be  made  between  dif- 
ferent individuals.  To  illustrate  the  allowance  to  be  made 
for  differences  in  different  price  levels,  we  note  that  money 
wages  in  the  United  States  are  higher,  for  mstance,  than 
money  wages  in  England ;  but  that  it  is  misleading  to  make 
any  comparisons  imless  we  first  correct  for  differoices  in  the 
price  levels  or  purchasing  power.  In  some  occupations  it 
wotild  seem  that  the  difference  in  wages  only  just  corresponds 
to  the  difference  in  tiie  purdiasing  power  of  mon^,  so  that 
in  those  cases  the  American  workman  is  really  no  b  tt«  off 
than  the  English.  In  such  cases  he  has  more  money  in 
wages,  but  its  marginal  desirability  k  so  much  less  that  he 
has  no  more  desirable  food,  lodgmg,  or  comforts.  In  most 
cases,  however,  it  is  a  fact  that,  after  all  allowances  are  made 
for  difference  in  price  levels,  the  lot  of  the  American  work- 
man is  better  than  that  of  the  English. 

{  8.  DMifw  or  W«sti,      Fdondatfam  of  Domuid 

Evidently  desirabiUty  is  a  far  more  fundamental  concept 
than  the  concq>t  of  mere  money  value.  Human  desires 
are  very  real  .wconomic  influences,  and  the  variations  in  their 
intensity  are  d  finitely  rq^stered  by  variations  in  the  de* 


Sac.q  THE  INFLUENCES  BEHIND  DEMAND  30X 

mand  for  goods.  Although,  therefore,  "desirabilities"  of 
goods  and  money  are  somewhat  elusive  to  grasp,  they  are 
by  no  means  unreal,  unimportant,  or  imaginary.  Like  the 
heights  of  the  clouds  they  are  difficult  to  measure,  yet 
definite  magnitudes.  They  are,  however,  magnitudes  per- 
taining to  sq>arate  individuals  personally,  not  to  society 
in  the  mass.  It  is  not  surprising,  therefore,  that  as  yet  we 
have  no  means  of  measuring  desirabilities  by  actual  statistics 
except  in  terms  of  money,  and  such  measurement  is  mislead- 
ing because  it  takes  no  account  of  differences  in  the  desirabil- 
ity of  money  to  different  people  or  to  the  same  person  at 
different  times. 

Moreover,  to  measure  desirability  in  terms  of  money  is 
merely  to  measure  a  cause  by  its  effect;  for  all  money 
valuations  depend  on  desirabilities.  Although  desirability 
tt  extremely  difficult  of  mrasurement,  even  Ua  the  individual 
concerned,  it  is  sufficiently  measurable  to  make  its  study  of 
great  and  fundamental  importance  in  economics.  Each  in- 
dividual who  buys  is  compelled,  in  fact,  to  decide  upon  the 
rdative  inqxMtance  to  him  ci  the  goods  he  buys  aiui  the 
money  he  pa3rs  for  them.  It  is  these  decisions,  based 
entirely  on  desirability,  which  among  millions  of  human 
beings  make  up  the  forces  on  the  demand  side  of  the 
market,  on  wbkik  forces  the  mariiet  prices  dq)eiid.  While 
desirabilities  seem  fleeting  and  indefinite  as  compared  with 
the  "hard  cash"  in  terms  of  which  we  daily  express  oiu" 
valuations,  yet  these  very  cash  transactions  are  simply  the 
resultant  of  innumerable  "desirabilities."  While  the  indi- 
vidual desire  is  fitful,  the  resultant  of  the  desires  of  all  the 
purchasers  is  relatively  steady, — just  as,  in  physics,  the  force 
of  the  individual  molecules  of  the  atmosphere  which  bombard 
our  bodies  are  variable  and  fitful,  but  the  aggr^te  resultant 
atmoq^hCTic  pntsan  is  a  steady  Mteoi  pouiub  par  sqpuure 
inch. 

In  this  chapter  we  have  endeavored  to  discover  the  in- 
flueoces  at  worit  bdiittd  demand.  We  have  found,  badL  ol 


30a      SLEMBMTAIV  VUtKa>LliJS  OV  ITONOMICS    [Our.  XVI 

the  demand  schedule  (or  curve),  the  demand  schedules  (or 
curves)  of  individuals ;  and  we  have  further  found,  back  of 
each  individual  schedule  (or  curve),  a  pair  <^  desiraUIity 
schedules  (or  curves),  one  member  of  eadi  pair  representing 
the  desirability  of  the  good,  and  the  other  the  desirability 
of  the  dollar.  By  comparing  these  two  desirabilities,  the 
individual  finds  how  many  dollars  the  good  is  worth  to  him. 
In  other  words,  he  translates  the  desirability  of  the  good 
into  terms  of  money,  which  is,  as  it  were,  the  universal 
language  of  commerce. 

1b  tame  cases  the  individual  is  saved  the  trouble  (A 
translating  into  money  by  the  fact  that  he  finds  the  trans- 
lation has  already  been  made.  Thus  a  commission  mer- 
chant, buying  on  an  order  from  a  customer  who  has  abeady 
t<M  him  at  what  price  to  buy,  has  little  difficulty  in 
making  up  his  mind  as  to  how  much  money  he  is  willing 
to  give.  He  is  willing  to  give  the  price  at  which  he  is  to 
resdl  to  his  customer,  —  less,  of  course,  a  slight  margin 
for  his  own  commission.  So,  also,  a  whdesale  dealer,  in 
buying  of  a  jobber,  is  guided  largely  in  his  decision  as  to 
what  prices  to  pay  by  the  prices  which  he  expects  to  get  from 
the  retailer,  and  the  retailer  is  similarly  guided  by  what  he 
e]q)ects  to  get  from  his  custonw.  But  even  in  sw±  cases, 
so  far  as  the  dealer  finds  money  valuations  ready  made  for 
him,  these  must,  of  course,  have  been  made  by  some  one, 
such  as  the  ultimate  customer,  through  the  painful  process 
of  comparing  the  marginal  desirability  of  the  good  with 
the  desirability  <A  the  daSai. 


CHAPTER  XVn 


m  nmuBNCM  behind  sdvpit 

§  z.  Analogies  between  Supply  and  Demand 

In  the  last  chapter  we  have  seen  that  a  total  demand 
adiediile  (<»r  curve)  for  any  particular  good  is  derived  from 
innumerable  individual  demand  schedules  (or  curves),  and 
that  each  individual  demand  schedule  (or  curve)  is  derived 
from  a  pair  of  desirability  schedules  (or  curves),  one  relating 
to  the  maiginal  (tesiraUlity  of  the  particular  good  under 
consideratku  and  the  other  rdating  to  the  marginal  deA- 
abOity  of  money. 

With  certain  excq)tions  to  be  explained  later,  precisely 
these  same  propositions  are  true  of  the  supply  side  of  the 
madcet. 

First  of  all,  then,  the  total  supply  at  any  price  is  merely 
the  sum  of  the  individual  suppUes  at  that  price,  as  illus- 
trated in  the  following  "  supply  schedules  "  for  coal  for  two 
individuals.  As  before,  we  distinguish  than  as  Individual 
No.  I  and  Individual  No.  II  (without  meaning  to  imply,  of 
course,  that  they  are  the  same  individuals  as  those  caUed 
No.  I  and  No.  n  in  Chapter  XVI). 


SoiKt  SlIllHH 
wools  n  Mjffui 

n.  Tdh  mn 

D  n  iRnmnoAu 

Total 
(•  +  ») 

I 

(•) 

n 

0) 

ti 

1500 

2000 

3SOO 

5 

1600 

2400 

4000 

1800 

3000 

4800 

r 

neo 

3900 

tfooo 

303 


3Q4  nniBiixMnr  nmciFus  ov  loonaiacs  fQup.xvn 


The  table  tells  us  that  at  a  price  of  $4  a  ton,  Individual 
No.  I  wffl  iupply  only  1500  tons  and  Individual  No.  n, 

2000  tons ;  that  at  $5  a  ton  Individual  No.  I  will  supply 
1600  tons  and  Individual  No.  II,  2400  tons;  and  so  on. 
The  last  column  gives  the  sum  of  the  figures  in  the  two  pre- 
ceding CQhimos.  If  we  should  indude  in  our  table  not 
simply  two  but  all  suppliers  in  the  market,  we  should  ob- 
tain in  this  way  the  total  supply  schedule. 

The  same  relations  are  incUcated  graphically  in  Figure  35, 
what  s^i'  is  the  supply  curve  for  coal  of  Individual  No.  I*, 
i.e.,  a  curve  such  that  if  the  latitude  of  any  point  on  it 
represents  a  given  price,  the  longitude  of  that  point  will 
represent  the  amount  of  coal  the  individual  is  willing  to 


9 

7 
e 
o 

3 
s 
I 


\ 

Fm.  35. 


supply  at  that 
price.  Similarly, 
s-iS%  shows  the 
supply  curve  for 
coal  of  Individual 
No.  II.  If,  as  in 
the  case  of  demand 
curves,  we  add 
longitudes  (e.^., 
Sy  =  Sxy-\-Sifi,  we 
obtain  SS'  as  the 
curve  representing 
the  total  supply  of 
both  individuals. 

If,  in  like  man- 
ner, we  add  to- 
gether all  the 


individual  curves  of  all  the  m^viduals  in  the  market, 
shall  obtain  the  total  supply  curve  of  the  market. 

Having  thus  derived  the  total  supply  schedule  (or  curve) 
from  its  constituent  iiuiividual  supply  schedules  {fa  curves), 
we  next  seek,  as  in  the  case  of  demand  schedules  (ot  curves)! 
to  derive  each  individual  supply  schedule  {jx  curve)  from  a 


Sa&il 


m  nmusMcit  buumu  lomY 


pair  of  desirability  schedules  (or  airves).  In  the  case  of 
the  seller,  however,  it  It  not  derirability,  but  iMidfiirability 
which  needs  to  be  ocunidered, — the  imdesirability  of  the 
trouble  and  expense  of  supplying  coaL  MargiMl  undetir- 
ability  is  also  called  marginal  cost. 

The  following  table  iUttttntes  the  derivatkm  of  the  sdler** 
undesirability  ciirve  or  marginal  cost  curve.  The  figures 
in  the  last  column,  found  from  the  second  and  third  by 
simple  division,  give  the  prices  a  coal  dealer  would  be  willing 
to  take  in  view  of  the  undesirability  of  the  trouble  and  ex- 
pense involved  in  providing  coal  and  the  desirability  to 
him  of  the  money  he  seeks  to  get  by  selling  coal.  If  the 
1500th  ton  costs  him  8  units  of  imdesirability,  and  a  dollar 
represoits  to  him  a  units  of  desirability,  he  wiU  evidently 
be  willing  to  take  $4  a  ton  up  to  the  xsooth  Um;  and  10  00 
for  the  other  figures  in  tl^  table. 


Turn  Sold 

Undbsixabiuty  or 
suppLYiNO  Last 
Tom 

DESotABiLiTy  or 
A  Dotuut 

m 

FucBinDusn 
WOULD  n  mufln 

ioTmb 

(•  +  ») 

XSOO 

8 

a 

l4 

1600 

xo 

a 

5 

1800 

13 

3 

6 

9IOO 

14 

3 

7 

The  same  relatioas  may,  of  course,  be  represented  graph- 
ically. In  Figure  36,  the  latitudes  of  the  points  on  the 
line  f/  iqataent  tibe  imderirability  per  ttm  <rf  i»ovidin^ 
the  coal,  and  those  of  the  lower  line  mm^  tepresent  the 
desirability  per  dollar  of  obtaining  the  money.  The  result 
of  dividii^  the  latitudes  of  the  points  of  tr'  by  those  of 
mm*  (m.,  by  a)  gtvea  us  Hhe  mpfAy  carve  s/,  the  iMi^ 
of  which  at  different  pdats  will  be  proportional  to  the 
hd^t  of  correjq[xmding  points  of  the  curve  r/.  The  lati- 


|q6  MLMwamn  mucDut  ot  wrammtn  foui^xvn 


tude  of  the  curve  r/  represents  the  undesirability  of  the 
efforts  and  Mcriiket  of  fun^dbing  each  mccearfve  unit,  or 

"  marginal  undesirability," 
and  the  latitude  of  the 
curve  ssf  represents,  in 
tenns  of  nxmey,  this  Mine 
margmal  undesirability  or 
marginal  cost  of  produc- 
tion; that  is,  the  suf^ly 
curve  is  the  undesirability 
curve  translated  into  money. 
Thb  translation  of  unde- 
sirability into  money  may, 
to  a  large  extent,  have 
been  aheady  made  for  the 


3-  

••••••< 


Fig.  36. 


dealer  by  others.  In  fact,  it  will  usually  happen  that  the 
larger  part  of  any  individual's  costs  are  in  the  form  of 
money  expenditures,— expmditures  for  labor  and  for  ma- 
terials. But  these  money  valuations  hav.  themselves 
come  about  by  the  process,  in  the  minds  of  laborers  and 
others,  of  comparing  the  undesirability  of  efforts  with  the 
desirability  of  the  dollar.  The  prices  or  "  latitudes  "  of 
the  supply  curve  are  found,  therefore,  by  translating  mto 
the  universal  language  of  money  miscellaneous  undesira- 
bilities  of  all  kinds.  That  is,  marginal  cost  of  production 
comprises  everything  undesirable  involved  in  supplying  the 
article  under  consideration,  including  all  discounted  future 
costs,  the  money  equivalent  of  all  labor  and  trouble,  as 
well  as  all  actual  money  expenses.  The  seller  is  more  apt 
to  thmk  and  talk  in  toms  ci  mmiey  than  tiie  buyer,  since 
the  seller  has  to  do  with  costs,  and  his  costs,  as  above 
stated,  are  usually  in  the  form  of  money  costs.  Ulti- 
mately, however,  as  we  have  seen  in  previous  chaptcis, 
back  of  all  money  costs  He  labor  costs.  Money  costs  in 
the  last  analysis  are  merely  the  accumulated  t;ansIations 
into  money  of  labor  costs.   Labor  ot  human  efidrts  thus 


aK.4 


not  omimcu  Tpyi!"*  fomv 


307 


stand  at  the  end  of  our  analysis  of  sui^ly  just  as  satisfac- 
tknu  stand  at  the  «m1  <rf  ow  analysis  of  demand.  Supply 
and  demand  are  thus,  in  a  feme,  tlie  moo^  equivalents  ol 
^orts  and  sstiffactionB. 

§  a.  Principle  ci  Mirginsl  Cost 

Hitherto  we  have  considered  the  marginal  desirability 
of  money  as  the  same  whatever  the  amount  of  coal  bought 
or  sold.  Exfuresaed  in  the  terms  of  the  diagram  we  have 
considered  the  marginal  desirability  curve  for  money  as  a 
horizontal  straight  line.  As  explained  in  the  last  chapter, 
this  was  essentially  true  for  the  piirchaser;  but  for  the 
sdkr  it  is  often  untrue.  The  purchaser  of ,  let  us  say, 
sugar  will  prize  a  dollar  substantially  as  mudi  whether  he 
buys  ten  or  twenty  or  thirty  ptounds  of  sugar  a  week  or 
none  at  all;  the  reason  is  that  this  one  commodity  cuts 
little  figure  in  his  total  budget ;  it  can  make  so  little  inroad 
on  his  income  that  it  can  scarcely  affect  the  desirability  ol 
money  to  him.  Even  in  the  case  of  coal,  where  the  ex- 
penditure may  perhaps  be  large  enough  to  pinch  the  pur- 
duser  aiqpredaUy,  the  desiraUHty  <rf  a  ddlar  would  i»rob- 
ably  not  be  noticeably  greater  if  ten  tons  a  year  are  bouj^t 
rather  than  five.  Each  consumer  expends  his  money  in  so 
many  different  dirertious  that  the  part  he  can,  under  or- 
dinary circumstances,  expend  on  any  one  commodity  b  too 
small  to  make  him  feel  appreciably  poorer  as  a  consequence. 

With  the  seller  of  sugar  or  coal,  ^n  the  other  hand,  the 
» '-.ation  is  altogether  different.  W?  -^reas  the  consumer 
e^teadi  his  moiwy  in  Uw  purduue  oi .  great  mmy  differ- 
ent goods,  the  producer  receives  his  money  by  the  sale  of 
a  very  few.  In  fact,  he  may  concentrate  on  one  only. 
The  coal  dealer,  for  instance,  usually  makes  his  living  by 
seliing  coal  and  nothing  else.  To  him,  therefose,  changes 
in  the  amount  of  coal  sold  and  in  the  {nice  ni  coal  irill 
make  a  great  difiorence  in  the  total  amoonk  of  mooqr  be 


lot    KUMMUnAaX  IMHClim  0>  ■OMWMCT  IQmiXVO 


sets,  and  dwrefore  b  its  marginal  dcsiralnlity.  li,  for 
instance,  the  price  of  coal  changes  a  dafittr  ft  tan,  thsoi^ 

to  the  purchaser  this  fact  will  not  appreciably  affect  the 
marginal  desirability  of  money,  to  the  seller  it  may  aake 
all  the  difference  between  poverty  sad  afluence. 

Tht^refore,  in  treating  supply,  we  csHMt  ahmys  Msume 

that  the  marginal  desirability  of  money  ren  iins  constan 
and  may  be  represented  by  a  hori;rontal  straight  line  In 
stead,  the  greater  tile  sales,  and  the  more  money  o  nse- 
qaently  obtained,  the  less  will  be  'he  marginal  cUitii!jgtj> 
of  money.    Therefore,  the  line  mm'    representing  the 
marginal  desirability  of  money,  should,  strictly  speaking, 
descend  to  tl«        as  the  sales  increase,  and  the  rate  of 
detcent  will  def>end  <m  tiie  peiee  cenoemed.  This  desond- 
ing  charactc    )f  the  curve  reprc  enting  the  marginal  de 
sirability  of  money  will  make  the  diagram  le^^^s  simple,  bu 
itwifl  stB  be  posiMe  to  derive  the  supply  curve  from  the 
deafraUlity  curves  <rf  ooal  and  of  money. 
^  The  suK>ly  curves  thus  far  considered  ascend  to  he 
right.   In  such  supply  curves  the  price  is  a  minimuB)  la 
dyely  to  the  supply;  that  is,  the  curve  showr  the  L«Cbt 
prices  at  which  given  amounts  wii  be  sup^^bd.  riipim 
ing  this  same  truth  the  other  way  around,  we  r  >  sa  ,  that 
the  supply  is  a  maximum  relatively  u        pi      i.e.  the 
curve  shows  tte  greatest  amounts  whk   wifl  i       p  ied 
at  i^ven  prices. 

We  see,  then,  that  thf  total  supply  r-  .  /e,  an  .  ^tmfy  - 
the  total  demand  curve,  may  be  derived  t>  m  n  m^m 
dividual  supply  curves  ^  Fig.  35) ;  that  each  such  '  'aa 
supply  curve  may  be  icrived  from  (i)  curves  <rf  mm^  ^ 
undesirability  of  furnishing  the  arti(  e,  nd  (2)  cur  s  o' 
marginal  desiral»Uty  oi  money;  and  tl  herefore,  the 
vof^  carve  is,  or  is  equal  to,  an  unt  sirabilitv  curve 
translated  into  terms  money. 

The  important  resui?  ts  that  the  marker  price  a  finally 
detomined  by  su]^  aad  donand,  it  net   alv  eq  <il  to  the 


oouHUfcn  lump  wotnn  ^09 


■larginal  desirability  of  get  ng  coal  for  each  buyer,  but 
a  *»  to  the  marginal  uadesirabUity  of  furnishing  it  for  each 
^eSm,  both  the  dcsirafaffity  and  the  undetirabflity  hdag 

measured  in  terms  of  money.  Thus,  if  the  price  of  coal  is 
$5  1  ton,  the  last  ton  bought  by  each  buyer  is  worth  barely 
$5  to  him,  while  the  last  ton,'  soi  I  by  each  seller  costs  him 
tkmt  $5  wor  V    '  expenie  ud  trouble. 

These  f^^ttaiiti^  on  the  margin  of  all  sales  and  purc'u  ies, 
mci  tact  that  the  price  must  b<  such  as  will  equ.Jize 
sup  nd  E  aand,  ije.,  "dear  ti-  market,"  are  among 
the  fu  iiB  \  i»{nc^ks  which  u«teniifaie  the  miti  lit 
pri=    it  xul  ^ood. 

It  may  b  orth  \  le  here  to  emphasize  the  fact  that 
m  hti  separate  maxiiet  at  each  stage  in  the  operations 
inich  coat  passes  from  producer  to  c(m»iiiii«p.  M 
ach  stage  supply  and  demand  fix  a  price  for  the  market  at 

at  stage.  The  first  market  for  a  U  is  at  the  mine,  the 
sellers  being  the  producers  and  t  ir  .yers,  middlemm,  who 
later  will  resell.  The  market  ce  at  the  mine  is,  of 
'-oursr  quite  different  from  thi  price  later  in  the 

^  '  olesale  market,  and  the  latter  price  is  dificrent 

in  turn  from  that  in  the  retail  .  .  But  the  same 
pcinc^es  apfiy  to  all  these  market  ^nccs. 

We  may  summarize  these  principles  as  follows :  — 

(i)  The  equalization  of  all  marginal  desirabilities  and 
undesirabilities  (both  being  measured  in  money). 

(3)  The  equaHcadon  of  snpfAy  and  danand. 

We  cannot  e.?>;'<  ct  either  of  these  two  principles.  Nor 
can  we  omit  either  half  of  the  first  principle ;  it  is  a  mistake 
to  think  that  price  can  be  determined  by  marginal  desira- 
bOity  alone  or  by  marginal  undeairability  alone.  It  takes 
two  sides  to  make  a  bargain  and  a  market  price. 

The  present  chapter,  however,  is  especially  devoted  to 
the  siqpply  side.  On  the  supply  side  of  the  market,  there- 
fne,  tiie  great  determinant  of  mariiet  i«ice  (in  tenu  ol 
moagy)  ia  Mwrfiwaf  cott  (in  tenna  oi  maamy). 


3ZO  xLucBHTAxy  PsnfopLES  or  BOCmOIIKS  (Cbav.XVO 

These  two  detmntiuuits  of  price  —  marginal  desirability 
and  marginal  cost  — are,  as  has  been  explained,  human 
desires  translated  into  money.  Marginal  desirability  rep- 
resents the  desire  to  secure  something  agreeable,  while 
marginal  cost  represents  the  desire  to  avoid  something 
(&agreeable. 

In  this  connection  it  is  important  to  remember  that  both 
the    something  agreeable  "  which  we  desire  to  secure,  an  .i 
the  "  somethmg  disagreeable  "  which  we  desire  to  avoid,  lie 
in  the  futxire.  When  an  intending  purdiaser  of  an  orduurd 
speaks  ot  it  as  a  desirable  object,  he  means  that  he  has  a 
desire  in  the  present  for  certain  expected  satbfactions  in  the 
fulnre,  —  satisfactions  from  eating  the  apples  or  other  future 
benefits  which  the  ownership  of  the  orchard  is  expected  to 
bring.  Likewise  when  the  owner  of  a  coal  mine  decides 
which  leads  or  galleries  he  shall  exploit,  he  bases  his  decision 
<m  what  Iw  erpeds  the  extracti(«  of  coal  to  cost.  The 
marginal  desu-ability  to  the  purchaser  of  the  orchard  repre- 
sents  future  satisfactions  translated  into  present  cash  by 
the  usual  process  of  discount,  and  the  marginijl  cost  of  coal 
CKtracticm  wpmrnta  future  expected  costs  translated  into 
cash  by  the  same  process.  Later,  when  the  expected  ntitfac- 
tions  or  the  expected  costs  have  become  past  history,  they 
no  longer  control  margmal  dearability  or  marginal  cost.  It 
is  the  costs  of  the  future,  and  not  (rf  the  past,  which  always 
control.  After  the  coal  miner  has  exploited  the  lead  w 
gallery,  and  it  turns  out  to  have  cost  more  than  he  ex- 
pected, he  will  not  on  that  account  obtain  a  hi^r  price 
for  the  coal  than  he  originally  calculated.  Again,  if  a  rail- 
way has  been  built  and  located  unwisely,  its  value  may  fall 
far  short  of  its  original  cost.   It  is  important  that  the 
student  should  carefully  avoid  the  error  of  believing  that 
the  prices  and  vahies  are  contrdled  by  what  things  nave 
cost  to  produce  in  the  past.  In  the  case  <rf  staple  artides, 
however,  which  are  constantly  being  reproduced,  and  of 
which  the  cost  does  not  greatly  vary  from  time  to  *vm^  the 


1st  IMftUtNCn  WBBXtD  BDVnT 


3" 


price  will  come  to  be  approximately  equal  to  this  cost ;  for 
the  cost  of  reproducing  in  the  future  will  be  practically  the 
same  as  the  cost  frtiich  has  been  experienced  in  the  past 
Even  in  these  cases,  however,  it  is  the  cost  which  is  ex- 
pected to  continue  in  the  future  rather  than  the  cost  which 
has  been  experienced  in  the  past,  that  fiimishes  the  con- 
trolling motive  to  the  producer  in  detenmoing  at  what 
price  he  will  supply  his  product. 

We  may  here  call  attention  to  the  fact  that  the  principle 
of  margbal  cost  implies  to  the  particular  case  of  gold  as  a 
commodity,  priced  in  terms  of  wheat,  or  priced  in  terms 
of  all  other  commodities  in  general  —  which  is  the  same 
thing  as  saying,  priced  in  terms  of  its  general  "  purchasing 
powor."  During  part  of  our  discussfon  of  money,  we  did 
thus  treat  gdd  as  a  commodity.  If  the  student  will  turn 
to  Figures  13-16,  he  will  see  that  the  distance  below  the 
line  00  of  the  highest  outlet  in  operation  from  any 
buUicm  resovdr  is  simf^  what  we  would  now  call  the  mar- 
ginal desirability  of  gold  for  use  in  the  arts  (measured  in 
terms  of  generid  purchasing  power  over  goods),  and  that 
the  distance  from  00  to  the  lowest  inlet  in  operation  is  the 
marginal  cost  of  production  or  undesirability  of  gold  (meas- 
ured likewise  in  terms  of  general  purdiasing  power  over 
goods).  That  is,  the  mechanical  representation  there  em<> 
ployed  is  merely  another  way  of  representing  what  we 
would  now  express  in  terms  of  supply  and  demand  of  gold. 

We  may  now  add  that  the  differences  in  costs  <rf  i»odwiB( 
gold,  represented  by  the  differences  in  heights  of  the  inlets, 
are  not  altogether  due  to  differences  between  mines,  but 
abo  to  differences  in  working  the  same  mine.  There  is  a 
marginal  cost  of  production  for  eadi  mine.  The  h^^r  the 
speed  of  extracting,  the  hij^er  the  cost  per  ounce.  This  is 
called  the  law  of  inrreamng  cost^   It  aiqplies,  of  course, 

'  It  !>  also  called  the  "  law  of  diminishing  returns."  The  two  expret- 
id«ujw^evideotly  equivalent.    Each  tUtement  txpnun  the  effect  of 


3ta  xlhocmxasy  niNcmjES  o»  loofNomcg  KkAr.xvii 


more  generally  than  to  gold  and  silver  alone.  In  this 
chapter  we  have  taken  coal  as  oiur  tyiHcal  esan^  We 
might  have  taken  numerous  other  examples.  If  the  price 
of  wheat  rises,  its  marginal  cost  will  rise.  Such  a  rise  in 
I»icc  acts  as  an  encouragement  to  the  production  of  wheat 
Just  as  we  have  seoi  that  an  encouragonent  in  the  produc- 
tion of  gold  leads  to  an  opening  of  the  poorer  mines,  so  an 
encouragement  \o  the  production  of  wheat  will  lead  to  the 
cidtivatkni  of  tne  poorer  wheat  lands.  At  a  given  price, 
th«e  are  always  some  lands  on  which  it  wiD  not  pay  to 
produce  wheat  because  of  the  prohibitive  cost  of  production 
upon  these  lands.  In  gold  mmes,  as  in  wheat  fields,  there 
is  a  nuuynal  pdnt  <^  production  beyond  which  production 
will  not  pay. 


i  3.  l^mud  Sofi^  Come  tAkk  Turn  BMk 

In  spite  ci  the  analogies  we  have  noted  between  the  supply 
and  the  demand  ade  of  the  market,  the  differences  betweea 
them  are  so  great  and  impmrtant  that  the  lestof  tUtcb^yUr 
will  be  devoted  to  them. 

Practicidly  aB  donand  curves  descmd  to  the  right,  and 
we  have  hitherto  assmned  that  all  mpfiy  curves  wtrfiwi  to 
the  right.  But  not  all  supply  curves  do  ascend  to  the  right. 
One  peculiar  type  of  supply  curve  grows  out  of  the  fact  re- 
ODtly  noted,  that  there  b  a  descoKling  curve  of  marginal 
dearability  of  money  dependent  on  the  i»ke  aaram^l, 
This  fact,  when  combined  with  the  ascending  curve  of  un- 
desirability  of  efiforts  and  sacrifices  (as  in  Fig.  36),  tends  to 
btBd  tie  supply  curve  upward  —  sometimes  so  much  as  to 
q— e  it  to  curl  back  to  the  left,  as  in  Figure  37.  Sodi  ft 
cam,  ftUlwaih  it  aacendt,  does  not,  tiooof^boiit  aO  its 

increasing  produciiun  ihe  ratio  of  cost  to  product  increases  it  is  the  — nt 
to  say  that  the  ratio  of  product  to  cost  decreases.   The  one  fom  of  ■MHHM 
is  that  there  is  greater  and  greater  cost  per  unit  of  protect  N^ntl;  dli 
other,  that  UwnklMsaBdhMpradtKkp«r  Mil  el  CMtiMMii.  ' 


THE  INFLUENCES  BEHIND  SUPPLY 


Y 

70 

BB 

AO 

m 

.33 

90 

■M» 
JK> 

J9 
JO 
M 

course,  ascend  to  the  right.    It  applies  eq)edaUy  to  the 
ply  of  labor.  The  meaning  oi  such  a  vsppfy  curve  is  tfast  a 
rise  of  price  does 
not  ahniys  cause 

an  increase  of 
supply.  At  first 
it  does,  but  be- 
yond tiie  point 
where  the  curve 
begins  to  curl 
back,  a  rise  of 
price  evidently 
results  in  reduc- 
ing the  supply. 

If  wages  are 
low,  a  rise  in 
wages  willat  first 
stimulate  him  to 
work  longer 

hoaot  hot  after  a  certain  point,  he  will  prefer  to  rest  on  hb 
oais.  He  esins  so  mudi  m  a  few  hours  that  he  feels  it  is 
no  longer  necessary  to  work  so  hard.  In  South  America, 
for  instance,  traders  from  Europe  were  once  buying  native- 
made  basicets  oS  a  peculiar  kind.  In  order  to  increase  the 
supply  of  baskets,  which  was  far  less  than  they  could  mar- 
ket in  Europe,  the  traders  decided  to  raise  the  price  that 
they  would  offer  to  the  makers,  thinking  to  stimulate  the 
production  of  baskets  by  inducing  the  moi  to  work  more 
hours.  Exactly  tht  opposite  result  followed.  As  aoon  as 
these  workmen  were  offered  high  prices  for  the  baskets, 
they  worked  fewer  hours  and  made  fewer  baskets  than 
before;  they  could  now  get  more  money  even  for  doing  less 
woik,  and  th^  did  not  need  or  want  more  mcmey.  ThA 
wants  were  so  few  and  simple  that  the  marginal  drairability 
of  numey  to  them  decreased  very  raindly  with  an  increased 
of  it;  and  their  disinrlination  to  work  was  so 


314     ELEMENTAKY  PSIMCIPLES  Ot  ECONOMICS    [Chap.  XVII 


great  that,  combined  with  the  feeble  desirability  of  its 
rewards  to  them,  they  would  supply  less  of  it  when 
the  rewards  were  great  than  when  they  were  small.  Similar 
instances  have  been  cited  among  tiie  Filipinos  and  among 
the  negroes  in  the  South.  Recent  experiments  in  coal 
mines  show  that  a  slight  increase  in  wages  stimulates  the 
men  to  work  longer,  but  that  a  large  increase  (sixty  per 
cent  beyond  the  ordinary  wage)  results  in  irregularity  of 
work  and  the  desire  to  reduce  the  number  of  hours.  That 
is  (as  shown  in  Fig.  37),  as  the  price  rose  from  the 
height  of  s'  to  that  of  s'\  the  supply  of  labor  or  number 
of  hours  spent  in  making  baskets  decreased  from  the  longi- 
tude of  s'  to  the  longitude  of  s". 

Now  this  same  principle  applies  to  all  labor.  Experience 
indicates  that  as  wages  go  up  workmen  demand  shorter 
hours.  The  eight-hour  movement  of  to-day  is  at  bottom 
due  to  the  fact  that  wages  are  high.  When  wages  were  km, 
men  worked  twelve  hours  a  day;  now  that  they  are 
high,  they  work  only  ten,  nine,  or  even  eight  hours  a  day. 
The  same  principle  explains  why  men  with  the  highest 
salaries,  instead  of  working- longer  hours  than  others,  usuaDy 
work  shorter  hours.  The  most  highly  paid  grades  of  work- 
men work  the  fewest  hours  and  take  the  longest  vacations. 

The  exact  point  in  wages  at  which  the  curve  begins  to 
bend  back,  so  that  if  wages  are  raised  any  higher  the  supply 
of  work  will  diminish,  depends  on  the  particular  conditions 
m  each  case,  the  size  of  the  workman's  family,  the  range 
and  character  of  their  wants  or  their  "  standard  of  living," 
and  other  similar  conditions.  The  more  wants  a  man  has, 
the  Jiigher  the  point  at  which  the  curve  begins  to  bend  back,' 
U.,  the  less  easily  is  he  satisfied  with  more  money. 

S  4'  Dmvifd  Supply  CtmrM 

•nc  typical  supply  curve,  with  which  we  began,  ascends 
continually  to  the  rig^t  A  diffemit  type  was  just  consid- 


Sic.  4]  THE  INFLU^CES  BEHIND  SUPPLY  3x5 

end,  one  in  which  the  rightwaid  movement  was  arrested 
and  turned  into  a  leftward  movement.  A  still  different 
type  is  that  in  which  the  curve  does  not  even  ascend,  but 
docends.  Sudi  descending  supply  curves  axe  omimoii 
under  modem  conditions  of  factory  producti(m.  It  is  often 
found  that  a  large  product  costs  less  trouble,  per  unit,  than 
a  small  product.  In  such  cases,  the  marginal  imdesira- 
iMlity  of  furnishing  the  good  decreases  with  an  increne  oi 
supply,  'a  .6.  not  only  decreases,  but  decreases  in  a  faster 
ratio  than  does  the  marginal  desirability  of  money ;  so  that 
the  ratio  of  the  one  to  the  other,  i.e.,  the  tnarginal  cost 
expressed  in  money,  decreases  wHk  tm  increase  of  supply. 

When  the  marginal  cost  decreases  with  an  increase  of 
supply,  the  supply  ciu^e  also  descends,  but  its  relation  to 
the  curve  of  margmal  cost  is  now  quite  ditlerent  from  what 
it  was  in  the  case  i»evknidy  considered  in  idiicfa  iht  ewes 
ascend.  The  mpf\y  curve  b  no  Imiger  the  curve  of  margi- 
nal costs,  but  must  be  constructed  on  an  entirely  new 
principle.  The  principle  that  market  price  is  equal  to 
marginal  cost  will  no  kmger  hold  true.  Only  when  the 
supply  curve  ascends  is  it  true  that  the  price  at  which  the 
seller  is  willing  to  supply  a  given  amount  is  equil  to  its 
marginal  cost,  and  is  therefore  derived  from  the  curves  <rf 
nndcsirabflity.  Descending  supply  curves,  idikh  we  tf« 
about  to  consider,  depmi  not  on  marginal  cost  at  1^  Inrt 
on  OMtage  cost.  The  reason  is  that  no  seller  is  willing  regu- 
larly to  sell  at  a  loss,  and  this  is  what  he  would  be  doing 
if  he  should  offer  to  sdl  at  i»ices  corre^KHkHng  to  marginal 
cost  when  the  margiiul  cost  decreases  with  the  amount  sold. 
It  is  clear  that,  if  the  cost  of  supplying  the  3000th  ton  of 
coal  is  $5,  and  the  cost  of  all  precediing  tons  is  {reofer  than 
$5,  not  even  oat  tim  <rf  coal  could  be  sdd  at  $5  a  ttm  witib- 
out  a  loss,  and  if  3000  tons  were  sold  at  that  price,  there 
would  be  a  loss  on  every  ton  except  the  last.  Rather  than 
seU  3000  tons  or  any  less  number  at  $5  a  ton,  the  dealer 
would  choose  to  sdl  none  at  all.  Contrast  tUs  remit  iriA 


3x«    sLnoNTAsy  nmcmis  of  economics  iCHAi.xvn 

that  which  obtains  in  the  case  of  an  ascending  curve  In 
ttis  case  if  the  cost  of  supplying  the  3000th  ton  were  $5, 
the  cost  of  aU  praoediat  toot  would  be  fesf  than  $5,  so  that 
instead  of  a  kss  there  would  be  a  gain  on  each  of  these  pie. 
ceding  tons.  Not  only  could  he  afford  at  $5  to  seU  3000 
botthia  UMMBI  gives  him  the  maamum  profit  —  more,  for 
imtaaaa,^MhmAmMwm  2oe» or  ^000  tata. 

Now  whether  the  cost  carve  asonit  m  descends,  it  is 
dear  that  any  dealer  to  sell  at  aU,  must  expect  to  get  back 
at  least  the  total  cost.  This  means  that  he  must,  therefore, 
Jarge  a  pAmatkastmlxk^ntbe  average  cost  per  ton. 
When  the  cost  of  each  successive  ton  is  greater  than  that  of 
the  preceding  ton,  the  cost  of  the  last,  the  marginal  cost,  is 
the  greatest  cost  of  all,  and  therefore  exceeds  the  average 
cost.    Consequently,  the  dealer  b  assured  a  profit  when 
selling  at  a  price  equal  to  the  marginal  cost.    But  when 
the  cost  of  each  successive  ton  is  less  than  that  of  the 
preceding  ton,  the  cost  of  the  last  ton  (marginal  cost)  is 
the  least  of  aU,  and  therefore  is  less  than  the  average  cost. 
To  sell  at  a  price  equal  to  maigiiua  coat  would,  in  this 
case,  mean  to  sell  at  a  loss. 

In  either  case,  whether  the  curve  ascends  or  descends, 
the  seller  will  seek  to  <tetamine  his  pifce  <m  the  basis  of 
the  higher  of  the  two  costs  (marginal  and  average).  Which- 
ever of  the  two  is  the  higher  will  be  the  one  to  appear  in 
the  supply  curve.  When  the  marginal  cost  increases  with 
wipply,  marginal  cost  is  the  higher,  and  wiU  rule  supply. 
When  the  opposite  is  tme,  average  coat  is  the  h%ber,  and 
will  rule  supply. 

In  the  latter  case  the  supply  schedule  (or  curve)  is  a 
schedule  (or  curve)  of  avwage  coats.  We  need  not  describe 
m  detail  how  to  construct  such  a  schedule  (or  curve).  TUs 
presents  no  difliculty,  since  we  already  know  how  to  con- 
•tottct  a  schedule  (or  curve)  of  marginal  costs  which  gives 
the  cost  individually  of  each  sqwrate  ton.  The  simple 
averafe  of  a^  ^edlied  aambcr  of  tbMo  ia  the  averace 


Ik.  si  m  IMffLUlMCIS  It  Mil  HP  somY  317 


cost  of  that  number.  This  average-cost-curve  will  descend, 
though  it  win  be  hi|^  than  the  marginal-cost-curve  from 
which  it  is  calculated.^ 

I  $.  lawiWim  Cntttooat  Ciua^  t  .4oa 

But,  berides  the  &ct  that  ascending  supply  curves  are 
based  on  marginal  costs,  and  descending  supply  curves  are 
based  on  average  costs,  the  two  tjrpes  of  supply  curves  offer 
another  and  even  more  important  point  of  contrast  The 
supply  at  a  price  is  in  the  first  case  the  maxmum  wMdi 
the  sdler  is  willing  to  offer  at  that  price,  whereas  in 
the  second  case  it  is  the  minimum.  In  the  first  case, 
the  more  the  sdler  can  sell,  the  more  he  charges.  In  the 
lecond,  the  more  he  can  sdl,  the  less  he  charges.  When 
we  consider  simply  ascending  types  of  supply,  we  may  ex- 
press the  relation  between  the  price  and  suf^y  in  two 
ways,  either  — 

(i)  Given  the  quantity,  the  price  b  tiie  wdmtmm  price 
at  which  that  quantity      be  supplied ;  or 

(3)  Given  the  price,  the  quantity  is  the  maximum  which 
will  be  supplied  at  that  price. 

The  first  of  these  two  propositions  still  holds  true  when 
the  wapfiy  curve  is  descending  instead  of  ascending ;  but 
the  second  will  not  hold  true  imtil  we  have  changed  the 
word  "  maximum  "  to  "  minimum."  In  other  words,  when, 
as  originally  supposed,  the  supply  curve  ascends,  the  seller 

'The  relation  between  cost  and  i»oduct  represented  by  a  descending 
siq>ply  curve  is  sometimes  called  the  "  law  of  decreasing  cost "  and  some- 
times the  law  of  "increaang  returns";  for,  it  is  evidently  the  same  thing 
to  say  that  tk$  ratio  of  cost  to  froiuct  decreases  aa  to  say  that  Ilk*  ratio  of 
fnduct  to  cost  increases.  The  one  form  of  statement  it  that  there  is  teas 
ttdlea  cott  pa  unit  oi  praduct  tttvaed;  the  other  that  tkoe  ia  greater 
■ad  fMtcrpcoduct  par  ndt  of  catt  faoond.  Thaaa  sipwioi  a»  fa 
aatitheib  to  the  "kw  el  iuamdi^  coat"  (or,  the  "law  of  diminMihig 
Ktums")  of  Is.    Tlmt  la,  dMontkaOy,  aa  fattennediate  cooditioa 


k  wffliiig  at  any  given  price  to  supply  a  certain  amount 
or  less;  but,  when  the  supply  curve  descends,  he  is  willing 
at  any  given  price  to  supply  a  certain  amount  or  more. 

In  the  case  of  demand  we  found  no  such  two  classes  as 
ascending  and  descending  curves.  In  all  cases  demand  de- 
CKues  as  price  increases.  Consequently  we  found  only 
one  sort  of  relation  between  price  and  demand.  The 
amount  demanded  at  a  price  is  always  the  maximum 
amount  which  wiU  be  taken  at  that  price;  and  the  price 
a  always  the  maximtm  price  which  wiU  be  given  for  that 
amount. 

Let  us  then  summarize  our  results,  e]q>res8ing  each  on 
the  basis  of  a  given  price :  — 

I.  At  a  gtyen  pike,  eadi  buyer  is  willing  to  take  a  certain 

maximum  amount  or  less  at  that  price, 
n.  At  a  given  price,  each  seller  is  willing 

(i)  (in  case  marginal  cost  increases  yrkk  an  increase 
of  supply)  to  offer  a  certain  ommmt  or  less  at 
that  price. 

(a)  (in  case  marginal  —  and  therefore  also  average — 
cost  decreases  with  an  increase  of  supply)  to 
<^er  a  certain  amount  or  mere  at  that  price. 
The  contrast  between  the  two  types  of  supply,  H  (i)  and 
II  (a),  IS  illustrated  graphically  in  Figures  38  and  39.  Figure 
38  iUustrates  case  i  and  Figure  39,  case  2.  The  curve  in  the 
first  case  is  seen  to  be  the  maximum  limit  of  longitude,  and 
m  the  second  case  -he  minimum  limit  The  kmgitude  of 
any  point  in  the  shaded  area  represents  an  amount  which 
the  seUer  is  willing  to  supply  at  the  price  corresponding  to 
the  latitude  of  that  point.  Thus,  if  w«  take  any  given 
horizontal  Kne,  such  as  oi,  in  the  shaded  area  of  Figure  38, 
J^Jj^^"^®  represents  an  assumed  price  at  which  the  seller 
is  wflHng  to  supply  any  amount,  from  nothing  at  the  left 
<»d,  a,  of  the  horizontal  line,  to  the  maximum  amount  at 
the  right  end,  h,  where  the  line  is  limited  by  the  curve. 
Taking  any  given  horizontal  line,  such  asoi,  hi  the  ■%fl4ft| 


8MXd  TKE  IMfLUJUNSi  Hlllll»  8IIIKV  $19 


area  of  Figure  39,  the  seller  is  willing  to  supply  any  anunint 
fxcm  the  tnininnim  longitude  (that  of  the  point  a  at  the  kit) 
up  to  an  indefi- 
nite amoimt  at 
the  right;  or, 
dropping  the 
flymbolism  of  the 
curve,  the  seller  is 
wiUing  at  a  given 
price  to  sdl  any 
amount  from  a 
certain  minimum 
upward. 

In  the  latter 
case,  i.e.,  when 
the  cost  of  each 
additional  unit  of 
product  is  less 


Aa.  at  (Biwly). 


than  that  of  the  preceding  unit,  the  more  the  seller  can  sell 
at  a  i^ven  fnoCf  the  bettor  he  likes  it  If  he  sells  only  the 

minimum  which  he 
is  wilBng  to  sdl  at 
that  price,  he  gets 
back  only  his 
average  cost  of 
production,  and 
makes  no  profit 
Any  sales  beyond 
this  bring  hhn  a 
profit,  and  the 
larger  the  sales,  the 
larger  the  profit. 
He  stands  ready  to 
seD  an  indefinite 
great  amount  al 
the  ffurm  pace. 


330     XLSmMXA&Y  ffincinit  or  "wnMr^ttt  |QM».zvn 


Thk  Uet  introdnoei  oi  to  an  mmpected  oondusioii,  viz., 
that  if  the  total  supply  curve  descends,  the  price  iept»> 
K&ted  at  the  intersection  of  the  supply  and  demand  curves, 
although  it  clears  the  market,  ia  not  a,  sUble  price,  but 
tends  always  to  /aU.  Whether  the  price  is  above,  at,  or 
y,  bebw,  the  latitude  of  the 

^  intersection,  it  will  tend  to 

fall  so  long  as  the  supply 
curve  descipnds.  Let  us 
oonsider  eadi  of  these 
three  cases  separately,  i.e., 
the  price  above,  at,  or  be- 
low the  intersection,  allow- 
ing the  demand  curve  to 
descend  faster  than  the 
supply  curve.  If  the  price 
(Fig.  40)  is  OP,  higher 
Wm.  4»  thas  the  intersection,  the 

demand  exceeds  the  mini- 
txxpply  and  stimulates  each  supplier  to  furnish  more 
than  his  minimum,  which,  of  course,  he  is  only  too  glad 
to  do.  Consequently,  supply  will  soon  overtake  demand. 
Those  competing  to  supply  will  strive  to  underbid  each 
other,  and  the  price  will  fall. 

But  it  wiU  not  stop  falUng  at  the  intersection.  For,siip- 
pose  it  is  below,  as  at  OP'.  It  is  evident  that  it  wffl  con- 
tinue to  fall ;  because  then  even  the  minimum  supply  exceeds 
the  demand,  and  all  who  compete  to  supply  will  be  very  eager 
not  to  be  left  with  unsold  goods  or  unused  productive  capac- 
ity. A  rise  of  price  would,  it  is  true,  remedy  the  difficulty. 
But  no  individual  can  apply  this  remedy.  The  individual 
competitor  cannot  raise  prices  without  securing  the  agree- 
ment of  others;  but  to  do  this  would  be  to  create  a  comUna- 
tion  which  is  contrary  to  our  present  hypothesis  of  independ- 
ent action.  If  he  should  individually  raise  his  price,  he  would 
be  committing  commercial  suicide,  for  people  would  not  buy 


of  him  when  th^  could  buy  more  cheqdy  of  his  competiton. 
St  only  hope  of  ndiieving  his  puipote  of  incrMied  lakt 
Uet  in  adoirtiiig  the  opposite  ooibm»  and  undendling  his 

competitors,  regardless  of  the  consequences  to  them  and  to 
the  market  price.  His  hope  b  that  before  they  can  meet  his 
cut  in  price,  he  may  win  iht  patronage  he  needs  to  make  it 
worth  his  while  to  stay  in  the  market,  and  that  he  may  thus 
drive  some  of  his  competitors  out  of  business.  If  he  fails 
to  get  the  needed  patronage,  he  must  go  out  of  bu^ness  him- 
sdf.  He  therefore  offen  1^  wares  at  a  ptkt  bdow  OP'. 
If  at  this  point  many  of  his  competitors  should  go  out  of 
business,  he  could  succeed ;  for  though  the  total  demand 
does  not  quite  reach  the  supply  curve,  it  will  reach  and  pass 
M$  supply  curve,  wUdi  Iks  much  to  tiie  kft  d  the  total 
npffy  curve  shown  in  the  figure.  But  hia  cowyetitofi 
remain,  and  under  these  conditions,  as  we  have  seen,  there 
cannot  be  two  prices  in  the  same  market  at  the  same  time. 
Hence  all  his  onnpetitors  must  reduce  their  prices  to  his. 

Whatever  the  ^ect  of  this  action  may  be  on  the  indi- 
vidual who  first  cuts  the  price,  the  result  on  the  whole  is 
evidently  to  make  matters  worse  ;  for,  according  to  con- 
ditions diown  in  the  diagram,  the  lower  the  price,  the  roan 
will  the  supply  exceed  the  <kDiand. 

We  have  here  what  is  known  as  "  cutthroat  competition  " 
or  a  "  rate  war,"  i.e.,  competition  the  effect  of  wldch  is  not 
simply  to  reduce  profits,  but  to  mate  losses. 

«.   MmKUBBf  TVBOaB^  WKU  JKOMOpOfj 

But  we  have  not  ytt  reac^  tiie  ultimate  rendt  of  such 
competition.  Some  conqxtilon  must  sooner  or  later  aee 
that  there  is  no  hope  to  secure  the  large  sales  necessary 
to  make  business  worth  while.  They  withdraw.  This  re- 
dooes  the  kmes  for  the  rest;  for,  by  ranovii^  thdr  supply 
curves,  the  total  supply  curve  is  MAscad  fal'loii^tBde,  f.0., 
ia  sbiftad  IflltwmRL  and      Mmyrt^ntm  *— •■i^ii^  mmmmm^  mm^A 


3St    tUmHTAlT  fMUCOMi  or  ICWWOIiMI  |Cm».XV& 


demand  is  lessened,  if  not  done  away  with  entirely.  But 
flvw  10,  tlMtandoicy  of  the  pike  to  &D  boot  hindered;  for 
we  have  seen  that,  as  long  as  the  tupp^  curve  decreases, 
competition  forces  the  prices  down  on  whichever  side  of 
the  intersection  the  price  may  be.  In  the  case  of  a  descend- 
iBf  wpply  curve,  the  ialmectioii  hat  nothing  to  do  with 
the  case.  Competition  with  descending  wisppiy  curves  will 
always  lower  the  price  so  long  as  there  are  any  competitors 
with  descending  suf^y  curves.  No  check  to  this  fall  is 
poidhle  untfl  either  competition  ceases  or  the  supply  curve 
ceases  to  descend.  If  the  supply  curve  at  some  point  at 
the  right  reaches  a  minimum  point,  this  marks  the  lowest 
point  to  which  the  price  can  f all ;  or  if  the  crowding  out 
of  competitort  fimOIy  leaves  onfy  one  luppKir  in  the  field, 
he  at  that  moment  becomes  a  monop^f^  and  the  prioei  iriU 
cease  falling  on  that  account. 

Not  only  may  monopoly  come  about  by  this  process  of 
"  ti»  snrvivml  of  the  fittest,"  but  it  may  aiw  come  tixgat 
m  another  way,  as  ah-eady  suggested,  i.e.,  by  combination. 
When  there  ^s  cutthroat  competition,  the  motive  to  combine 
is  strong.  No  one  of  the  competitors  relishes  the  prospect 
of  being  crowded  out  any  mofe  than  he  iciihes  tiie  prospect 
of  continued  cutthroat  competition.  Whether  combination 
will  actually  result  or  not  dei)ends  on  a  variety  of  circum- 
stances. One  or  more  of  the  competitors  may  flatter  himself 
that  the  rate  war  w31  aid  in  crowding  out  aU  suf^iiiers  except 
himself,  and  prefer  to  keep  up  the  fight  to  the  bitter  end. 
Others  may  keep  on  from  other  motives,  being  prevented  by 
pride  or  resentment  either  from  withdrawing  from  the  contest 
or  from  beg^«  ^eiriivabto  form  acombnsatiiHi.  ^t  lor 
our  present  purpose  it  does  not  matter  much  whether  the 
UKHK^ly  which  finally  results  comes  from  the  final  siurvival 
of  one  supplier  or  from  deliberate  combination  of  many  sup- 
pliers, la  tiibKx  case  the  result  is  monopoly. 

We  find,  then,  from  our  study  of  the  supfdy  side  of  the 
Quufcet  that  supply  curves  somrtimfa  dcscaid,  and  that  m 


•nil 


m  OfrLUKNCES  BEHIND  SUmY 


such  cases  competition  is  "  cutthroat "  competUkn,  Md  M> 
suits  in  losses  and  tends  toward  monopoly. 

In  all  our  reasoning  we  have  assumed  periect  competitkm 
to  start  with.  It  should  be  noted  that  in  actual  fact  com- 
petition is  always  somewhat  imperfect.  The  slight  under- 
cutting of  prices  by  one  grocer  will  not  ruin  the  trade  of 
anotner  in  another  part  of  the  same  town  for  the  reason 
that  the  two  are  not  absolutely  in  the  same  market.  Eadi 
has  a  sphere  which  the  other  can  only  partially  reach,  not 
only  because  of  distance,  but  also  because  each  has  his  own 
"  custCMn,"  i.e.,  the  patronage  of  people  who,  from  habit 
or  from  other  reasons,  would  not  change  grocers  merdy 
because  of  a  slight  difference  in  price.  Thus  each  is  pro- 
tected by  his  partial  isolation.  We  see,  then,  that  even  when 
supply  curvet  descend,  competition  nuy  be  so  limited  as  to 
prevent  any  very  fierce  rate  war,  the  nte  war  being  pre- 
vented by  partial  or  local  monopolies  among  the  suppliers 
in  the  first  pl.ice.  A  rate  war,  therefore,  is  never  a  pmna- 


nent  or  notixial  c  '^nditimi.  If  not  avdded  at  first  by  imper- 
fect competiii  -  pMrtiid  monopoly,  it  Is  brou|^t  to  an 
and  evwkually  'v/  ite  moaopo^  to  idJdi  it  leads. 


We  have  now  to  notice  another  peculiarity  on  the  sui^ly 
side  <^  the  nuu^et.  The  peculiarly  rderred  to  is  the  fact 
that  Han  are  often  costs  wiiidi  do  not  vary  with  supply,  but 
remain  unchanged  whether  the  supply  is  krge  or  — t*"  or 
nothing.  These  are  called  the  fixed  costs  as  contrasted 
with  the  costs  whkh  vary  with  supply,  which  are  called  the 
rmmmg  costs.  If  d  coats  are  in  the  form  of  actnal  monqr 
oqMnMSy  ^  tm  dani  aer  abo  called  respeOtwiy  /bui 
expenses  and  running  expmua.  The  fixed  expenses  of  a 
railway  omipany,  for  instaiws^  consist  of  the  interest  on 
te  boBdi.  T1m»  raaning  ezpensas  oonaii^  of  Oe  salaries, 
iHipii  shI  yi^Miis  for  im^  SMitoBUi^  etc.  eoi^ 


§  7-  Fixed  and  Rannijt:^:  Co  r  .^ 


3«4  BUKEMTAiY  nmiciKn  or  icxmcaacs  |ciut.xvn 


costs  Utherto  bduded  in  our  discusuons  were  running  costs. 
The  fixed  costs  were  not  ioduded,  because  they  have  no 
effect  on  variations  in  supply  curves.  We  shall  now  study 
fixed  costs  merely  to  show  that  they  do  not  have  any  effect 
on  supply  after  once  they  have  been  incurred,  a  fact  at  first 
Muprmng. 

In  general,  fixed  costs  of  production  of  any  given  goods 
consist  simply  of  interest  on  past  costs  which  have  been 
"sank "  in  the  business,  ».«.,  which  cannot  now  be  reim- 
bursed to  the  owner  except  as  the  sale  of  his  goods  may  re- 
imburse him  in  part  or  m  whole.   As  we  have  seen  in  a 
previous  chapter,  interest  is  not  a  cost  to  society,  for  it  is 
naerely  a  payment  from  one  person  to  another,  an  interac- 
tion. (See  p.  76.)   To  society  as  a  whole  the  only  cort  is 
the  "  sunk  "  cost,  which,  in  the  last  analysis,  consists,  as 
has  been  explained,  of  the  labor  expended  at  various  times 
in  the  past.    But  to  the  individual  supplier  —  and  his  is 
the  only  cost  in  which  we  are  at  present  interested  ~  in- 
terest is  a  cost.    If  he  pays  no  interest,  he  must  have  fai- 
curred  the  "  sunk  "  cost  bimself,  in  which  case  this  past 
sunk  cost  constitutes  his  only  fixed  cost ;  there  is  then  no 
fixed  annual  cost.   In  mie  <rf  the  two  ways  he  must  bear 
the  burden  of  sunk  cost.    That  is,  either  he  must  have 
borne  it  in  the  past  directly,  or  he  must  now  be  paying 
intorest  to  some  one  else  who  so  bore  it.   The  two  ways  are 
equivalent  in  the  same  sense  that  two  goods  are  equivalent 
which  exchange  for  one  another.   That  is,  a        cost  of 
$100,000  is  equivalent,  if  interest  is  five  per  cent,  to  a 
fixedoost  of  $5000  a  year.   Whether  the  individual  person 
or  compuy  has  sank  theftoo,ooo  in  the  past  or  is  paying 
a  year  to  some  one  else  who  did  —  in  neither  case 
does  this  cost  enter  into  the  cost  (or  undesirability)  curve, 
or  the  resultant  supply  curve,  or  the  resultant  price. 

We  shaa  dte  some  enmpies  wfaicli  have  been  almost 
Uterally  realized  in  actual  Ufe.  A  man  once  sunk  about 
|ioo,ooo  in  a  hotel  on  the  top  of  a  FnoMntain    He  &wad 


8k;  9) 


IBS  mfunQKn  aijiiw  nimy 


3*5 


that  so  few  guests  wanted  to  go  there  that  the  most  he 
awU  earn  was  faooo  b^ond  Ut  rmmbig  gipiinm  Ha 

never  succeeded  in  recovoing  the  sunk  cost,  and  the  fact 
that  he  had  stink  $ioo,coo  gave  him  no  power  to  com- 
mand prices  high  enough  to  enable  him  to  succeed.  Nor 
could  he  withdraw  from  the  busineaa  and  recover  his 
$100,000.  Wb  building  was  worth  nothing  except  for 
hotel  purposes.  He  could  only  make  the  best  of  his  mis- 
investment  and  run  his  hotel  for  $2000  a  year.  This 
was  better  than  nothing  at  all,  whidi  would  have  been 
the  result  of  going  out  of  business.  The  $100,000  sunk 
in  the  past  was  sunk  just  the  same,  whether  the  hold 
was  run  or  not. 

Another  hoUsL  keeper  hofMrntA  $100,000  on  bonds  nd 
paid  interest  at  five  per  cent,  ».«.,  $5000  a  year,  to 
the  bondholders.  His  business  paid  running  costs,  but 
only  $3000  beyond  those  costs,  so  that  he  failed  by  $3000 
to  earn  enough  to  pay  his  interert  to  the  boncHtohtes. 
The  hotel  was  losmg,  in  actual  money  expended,  $3000  a 
year.  But  even  m  this  case  the  hotel  could  not  be  aban- 
doned. The  only  result  was  to  change  owners.  The  bond- 
hoklers  forecfeted  their  mortgage  and  ran  the  hotel  them- 
selves. As  it  still  earned  $2000  beyond  running  expenses, 
they  found  it  more  profitable  to  continue  the  business  and 
get  two  fifths  of  their  interest  than  to  dose  and  get  nothing. 

In  dther  of  these  two  cases,  whether  the  hotel  was  built 
by  the  owner  out  of  his  own  purse  or  whether  it  was  built 
out  of  borrowed  money,  there  was  a  loss  equivalent  to  three 
fifths  of  the  original  cost,  or,  what  amounts  to  the  same 
thing,  three  fiftia  of  the  interest  thereon.  Yet  tUs  cost 
could  not  be  avoided,  whether  the  hotel  business  were  large 
or  small  or  abandoned  altogether,  and  it  "  paid  "  to  run  at 
a  loss  rather  than  to  dose  down  at  a  greater  loss.  This 
paradox,  that  **  it  sometimes  pays  to  ran  at  a  less,"  is  im- 
portant to  analyze  and  to  understand. 

A  third  botd  kaeper  made  a  hicky  hit  with  his  |xoo^. 


336    XLEMENXAKY  VStSCSFUS  Of  BOOHOMUi  fCte^XVD 

He  got  not  only  his  nunlag  apmm  and  bOmat  on  the 

*ioo,ooo,  but  a  handsome  profit  besides.  But  this  fact  «i 
not  affect  the  prices  at  which  he  was  willing  to  supply  to. 
commodatfens.  He  stiU  charged  as  muTw  he  awkl 

The  pomt  to  be  emphasized  k       in  a|  thne  cmm  the 
past  fixed  costs  had  no  influence  on  prices.   Whether  tlwM 

Tfo  Z  Ti'lf*"'^'  ^'  «^  burdensome, 

as  fa  the  otter  two.  they  have  no  influence  on  prices.  IiJ 
each  case  the  owner  tries  to  make  the  most  he  am.  The 
fixed  costs  take  out  the  same  amount,  whatever  he  does,  and 
"1^  ^'^^^  ^  deciding  what  is  best  ti  do. 

It  foUows  that  fixed  costs  will  not  even  prevent  prices 
under  the  stress  of  compeUtfcm,  from  going  beiow  what  will 
pay  those  costs.  A  railway  may  be  making  money  enourii 
^L^^""^  a  handsoT 

r  *  P"^*^        ^  ^"^^   Then  each 

tries  to  take  busmess  away  from  the oOier;  aratewaren- 
S™^tP"u  ^  of  freight  and  passenger  services  are  driven 

interest 

payments,  yet  neither  can  afford  to  stop  running,  for  then 
It  wojJd  run  behind  stifl  further.  Welve  here 't^  .^S 
cutthroat  competition  as  when  the  supply  cam  6mo^ 

fixed  costs.  If  aho  the  supply  curve  desceads,  th*i,  there 
are  two  condition.  t»Ba«  um^  c^mpetidT 
namely,  the  existence  of  the  defending  s^y  cWZl' 
the  existence  of  fixed  costs.  A*  ^mat^a^L^mmUl 
oowHtioiii  aie  often  united.  mi  m^tm 


it. 


The  ^  eoili  -  fixed  eigi  »«d  runidug  ^osts  -  nnt 
each  other.    This  may  best  be  seen  1/  we  .iLdM  nmm  ^ 
P»«W    «•  and    parMAgjbr     ui«:s.    fiy  giMiMi 


Sac.  ^  THE  DmUEMCBS  BEHIND  SUPPLY  3*7 

ootts,  alsocaDed  "  overhead  costs,"  are  meant  costs  which, 
though  they  could  be  got  rid  of  if  the  business  ceased,  will 
not  greatly  vary  whethor  the  business  is  large  or  smaiL 
They  indode  the  kbor  of  wyetintmfciiwi,  aatarfv  of 
chief  officers,  rent  of  rented  quartcn,  interest  on  short- 
time  loans  for  stock  carried,  etc.,  power,  lighting  and  heat- 
ing, insurance  and  repairs.  By  particular  costs  are  meant 
those  which  apply  to  each  particular  wit  so  that  tlMfar  tatei 
unmmt  will  vary  almost  or  quite  in  pr(^)ortiaii  to  the 
amount  of  product  sold.  Thif  iadude  ooit  ol  wm  mute- 
nals  and  ordinary  wages. 

Now  when  the  supply  curve  (faMais,  l*^  ^^"^  mmm^ 
costs  decrease  with  increase  of  suj^ly,  the  reason  is  usually 
found  in  the  "  general  costs."  As  the  total "  general  costs  " 
remain  little  changed  by  an  extension  of  the  stqpfdy,  the 
fpsasxtX  costs  per  unit  supplied  grow  luaBn,  Ikeiaq^ 
9ap^.  These  costs,  added  to  the  particular  costs,  which  re- 
MUfai  practically  the  same,  evidently  cause  the  total  running 
cost  per  unit  to  decline  wiHi  u  increase  in  productioii.  Ycx 
instance,  let  us  suj^Mse  ft  dwe  factory  wfcfcfc  tin  gMMl 
mt/tB  (lor  office  salafki,  kecking,  lighting,  rent,  insurance, 
tie.)  amount  to  $100,000  a  year,  while  the  particular  costs 
for  materials  (leather,  etc.)  and  labor  ^plied  to  the  mate- 
rials (cutting,  sewing,  etc.)  anmatt  to  $i  ^  ^  ei  *M 
U  ii  iiUm  tibai  the  peeter  Ae  product,  the  less  Hbtm^ 
of  shoes  per  pair.  If  10,000  pairs  are  produced  per  an- 
num, the  share  of  the  ge&«^  costs  ($100,000)  which  each 
pair  muec  bear  wiB  be  $io.  This,  added  to  tte  piilMv 
Ml  for  pilr  wiE  make  a  toiri  coit  per  pdr  ei 
If  / ;  but  if  the  output  of  the  factory  is  100,000  pairs,  the 
•kare  of  the  i»cral  cost  ($100,000)  which  each  pair  must 
btif  wM  be  only  $i,wUch,  added  to  the  particid«rt9il#t 
fm  fftk),  «•  adke  •  mA  coat  per  pair  of  $2.  Thus  we 
Mf  tlial  fhc  total  cost  per  pair  will  in  each  case  be  the 
particulftr  a04  $1,  {rfus  the  share  in  the  general  cost,  which 
irM  ke  larfe     •  mmB         aad  audi  for  ft  kiiieii^iit. 


3aa  ««iiHTAiy  MmaPtES  OP  ECONOMICS  ICha,.xvii 

«  willing  to  supply  a  given  ZoZ^  ^JttX 

he  ,5  wiUmg,  if  need  be,  to  seU  at  pri^^J^^l^'u 
^^Z^^  costs  in ^ditfonTo^jt 

^ght  have  escaped  thST^  h^Tr^heTt  "Ze  ^ 
original  investment,  but  now  it  is  too  late  -^Jt^-ff 
ence  between  find  «id  «ni«l  ™  i! 
one  of  dates    iSLn  •    ^^P®*^'  then,  is  chiefly 

no  longer  do  this.   The  fixed  costs  >».       «L  *  . 
remand  he  must  let  ^T^.'^y^r''^'^''''' 
Sja  ^en^  mnning  cost  and  supply  curves  are  inde- 

m^c^f^Tf  ^^'^P"*^^  ^Wch  results  from  this 
■i^iy  curve  and  the  demand  curve  .•  j 

f«n  that,  on  the  dt^iMe'tZ.^LiXt  T.'  ^ 
buyit  on  the  basis  of  what  b.;,^;Jl'»^ 

sen  11,  lea  It  on      ba^  ol  what  it  wiU  co»t  th*.m  ;„ 
future  to  continue  in  the  hmkml  mim^       w  ^ 
costs  which  were  sunk  in  thepaT  ^-^l^i^ 
•t^ted(somew^t  imperfectly)  as  follows":  -  ' 

-  nw  owWiSB^  6}r  to  «  ^  piBBiiitfBii,  b«t  only  by  i|» 


SS&91 


not  DULUZNCBS  BIBDID  SUfffLY 


$99 


benefits."  The  imperfection  in  this  statement  is  Its  failure 
to  discriminate  past  from  future.  The  costs  of  production, 
if  they  be  future,  do  eater  into  value,  prediefy  at  futara 
benefits  enter.  Future  oostt  are  estimated  in  advance 
just  as  future  benefits  are.  For  instance,  the  value  of  the 
great  irrigation  plants  in  the  West  now  in  process  of  con- 
structkm  is  dependent  upcm  their  future  ei^MCted  bme- 
fits,  taken  in  connection  with  the  future  expected  cost  of 
completion.  Past  elements  are  without  significance.  The 
future  elements  being  given,  the  value  of  the  irrigation  will 
be  the  same  whether  the  past  cost  was  large  ot  unall,  or  noth- 
ing whatever.  Of  course  it  is  true  that  the  future  expected 
cost  of  completing  the  plants  is  less  than  if  some  of  the  work 
had  not  been  ahready  accomplished,  so  that  the  greater  the 
past  cott  has  been,  the  leas  the  future  cost  oug^t  to  be,  and 
iMooe  the  greats  the  imsent  value  of  the  plants.  But  what- 
ever causes  mayincreaseor  decrease  future  benefits  and  costs, 
it  remains  true  that  the  present  value  of  anything  depends 
Mclusivdy  m  the  future  benefits  and  ooati  wfaichit  yields. 

It.  MoMf^r  MM 

The  waept&at  principle  wUdi  guides  econon^  aetfoB  b 

the  principle  of  maximum  gain.  This  principle  implies 
both  to  competition  and  monopoly,  but  its  application  is 
di£teent  in  the  two  cases.  In  the  case  of  competition  the 
pffoe  act  by  a  man's  eompetftws  is  an  inqxxrtant  deaawt 
which  must  be  reckoned  with  by  that  man,  while  in  the  case 
of  monopoly  he  has  no  such  element  to  reckon  with.  In 
fact,  mon<^o^  is  best  defined  as  absence  of  competitioH. 

bt  fflp^fafeg  tiw  prindi^  on  wldeb  nKmopdy  price  is 
fixed,  we  shall  first  assume  that  competitk>n  is  entirdy 
absent,  there  being  no  fear  even  that  1^  prices  «9I  lead 
to  oonqMtitMMi  in  the  f^ure. 

Vxdm  tfasse  dratoMiams  tbe  mooopcM  wiB  fi«  his 


wiU  charge  "  what  the  traffic  wiU  bear."  ie  wiU  nuf  .m 
^  price  to  the  pdnt  which  wiU  give  him'  a  r^^'^l 
The  b^er  the  price,  the  larger  the  profit  per  wtU^ 
But  If  he  makes  his  price  too  high,  he"^  Z  X  » 

Sv^^'  ^S"^""  ^^^^  profit' 

parumt  By  trial  and  error  or  by  exercise  of  his  best  jude- 
ment  he  steers  a  middle  course,  and  sdecte  that  pria 
wbch  he  thmks  WiU  render  his  profit  a  maximum  ^ 

In  general,  the  price  under  monopoly  will  be  hiijher  than 
under  competition,  but  this  will  noVaJways  beTi^ 
as  may  happen,  the  costs  under  monopoly  t«  less  tha«  the 
costs  under  competition.  In  some  cases  monopoly  may 

^  ZZf  ♦^'^  ^  T"^  ^'^^^  P^°fi^  i«  ^red 

oy  seet&ig  the  pnce  lower  than  under  competition.  Such 

economies  in  coat  come  from  getting  ikl  of  duplications  in 

plant,  management,  and  advertising,  and  by  havfec  *e 

ad^jtttages  in  general  of  large-scale  production. 

Wien  monopoly  price  exceeds  price  under  CMnpetition, 
there  IS  usuaUy  dan^  tlurt  competMon  wii  thoeby  ^ 
invited.  PracticaUy  such  danger  is  seldom  absent  Cam. 
pernios  which  is  feared,  but^ot  in  actual  existence,  is  calkd 
P«t«tlal  competitKjn.  This  potential  competition  haTS 
rffect  ^  to  real  con^i^itfon,  m  tiM  under  monopoly 
the  pnce  is  usuaUy  not  quite  "  aU  the  traffic  wiU  hmt?^ 
J^eth^between  that  and  the  price  that  would  resuh  f,^ 
•owu  competitKm  In  general,  prices  are  seldom  deter- 
^ed  mider  conditioi«  either  of  perfect  monopoly  or  of 
perfect  competiUon.  There  is  usually  a  partial  ^i,i„„,,i 
or,  what  IS  the  same  thing,  imperfect  compeUtion.^^' 

lUere  tie  many  and  obvious  e/ils  in  monopoly  Some 
monopohes  originate  in  a  defibeiMe  pfam  to  do  eviL  in  a 
conspiracy"  to  raise  prices  and  without  any  cxamfnm 
cutthroat  competition.  But  the  evils  of  hfgh 
aaongthetejstoftheevifaofmonopoJy.  Thefeare^S^ 
evils  involved  in  the  ruU^MesMaaf  crmhina 
by  fim  kmtring  pda^miml!^2S^^ 


THE  INTLUXNCES  BEHIND  SUPPLY 


the  evils  d  dkofaBinstioii,  or  duuging  (Afferent  prkei  to 

different  persons  or  localides.  There  are  also  the  dangers 
of  political  corruption  and  control.  The  reader  will  have 
an  opportunity  in  othCT  books  to  ttaAjr  tlww  evik  and  tbe 
proposed  remedies ;  we  cannot  prop«ly  discuss  them  here. 
We  may,  however,  take  space  to  warn  him  to  avoid  the 
common  but  false  conclusion  that  all  monopolies  are  eviL 
Ta.  fact,  a  dad  lesscm  from  this  chapter  is  that,  m 
contrary,  competition  itself  is  sometimes  an  evil,  ivIm 
it  is  of  the  cutthroat  kind,  for  which  some  form  of  mo- 
nopoly is  the  only  remedy.  When  any  business  invcdves  a 
hrge  sunk  cost  or  has  »  iwcimliiig  cost  cmwt,  mti  tkH»- 
fore  a  descending  supply  owe,  flsnfMlitiaB  hscomes  of  the 
cutthroat  kind.  Even  if  we  deny  our  sympathy  to  those 
producers  who  lose  by  sudi  ct»npetitbn,  we  must  not  fail 
to  note  that  k  tite  end  emmmam  wfi  Isse  tim.  "As 
reason  k  ^t  ^^Mn  cutthroat  competition  a  feued,  i»o- 
ducers  will  avoid  sinking  c^tal  in  the  enterprise.  It 
is  kiydy  in  recc^^nition  oi  das  fact  and  in  order  to  en- 
osswags  rach  invtstuMst  tfnt  fttttM  aii  oc^yrii^ts  act 
HpsHi.  Hiese  are  mom^wies  a^mmif  §mtmmk  by  tiie 
government.  Herbert  Spencer  once  inveirt«d  an  exollent 
invalid  chair,  and,  thinking  to  give  k  to  tke  ^mxH  wi^ut 
VSCMBpCSMe  to  IMuM^,  dM  S8(  |wtsvt  k.  'jFks  MHlIt  WM 
that  an  mwwfarturer  dared  rkk  undertakkg  ki  maau- 
facture  Each  knew  that,  if  it  succeeded,  competitors  would 
^Mriag  u{>  and       him  ci  most     all  of  ^  {NK^ts,  wlsfe, 

CILa  aJ^^m  ^  -*  iiiiil Ai    fail  J  auJiMMw 

ne  onsr  mm,  k  «■»  eusqpgm  fawway  ooi^ 

petition  has  ssHMiteM  resulted  ia  Iflkig  Miway  oiterprise. 
The  rise  of  trusts,  pools,  and  rate  agreements  is  largely 
dbie  to  the  necra^y  of  protocticm  fr<»B  a»apetiti(m, 
ckify  analogous  to  dto  protoctioa  gfvea      patents  aai 
copyrights. 

Combinations  are  largely  the  rewlt  of  the  two  conditioi» 
we  have  bem  consider^  -  the  fact  thi^  the  M^ly  awe 
dtooiBdSy  aad  the  (act  that  there  k  kqps  iii¥iitari  oyitii. 


$S»  wuMMmAKt  mucmis  or  konoiiicb  (Cbat.  xvn 

The  antitrust  movement,  in  so  far  as  it  aims  to  compel 
competition,  does  not  take  these  facts  into  accoimt ;  nor  does 
h  vuderstaiid  the  neceiaities  which  have  led  to  monopoly. 
So  considerable  are  the  lines  of  business  in  which  dther 
there  is  a  large  sunk  capital  or  a  descending  supply  curve, 
that  if  we  do  not  allow  some  form  of  trade  agreements 
many  kinds  of  trade  are  to-day  practically  unpossible. 
Restrictive  measures  should  be  directed  toward  the  control 
of  monopolies  and  combinations,  not  to  the  restoration  of 
competition.  At  the  present  time  the  general  tendency  is 
towards  those  forms  of  productk>n  in  yrtkii  cutthroat  com- 
petition figures  and  in  which  monopoly  will  ultimatdy 
rule.  It  must  not  be  supposed,  however,  that  all  or  even 
most  of  productive  enterprise  is  of  this  character.  There  is 
an  immense  field  in  which  the  older  iom  of  competition 
still  holds  sway ;  that  is,  in  which  marginal  cost  increases 
with  increased  production  so  that  the  supply  curve  is  of  the 
ascending,  not  the  descending,  type.  In  such  cases  com- 
petition is  stiU  the  "  lif e  of  trade  "  and  affords  a  safeguard 
for  the  consumer  against  exorbitant  prices.  Such  com- 
petition needs  no  r«guUti(m,  and  in  genoal  i»  better  off 
without  it 


CHAPTER  XVm 


ICDTOAKLY  XELATED  PUCES 

f  I.  AfUln«» 

W>  have  leen  how  the  pcke  of  any  particular  good  is 
determined  under  varying  conditions  of  competition  and 
under  monopoly.  In  each  case  the  particular  price  has  been 
considered,  quite  apart  from  other  prices.  We  found  that 
each  price  was  detennbed  by  its  own  supply  and  demand. 
But  **  «ipply  and  demand  "  were  expressed  by  schedules 
(or  curves)  which  in  turn  depend  upon  schedules  (or  curves) 
of  desirability  which  themselves  depend  on  innumerable 
outside  conditions  —  among  them  bong  other  prices  than 
the  particular  price  in  question.  In  fact,  we  have  seen  that 
these  separate  curves  are  affected  by  the  general  level  of 
prices.  We  now  have  to  observe  that  they  are  also  affected 
by  other  particular  prices. 

In  the  first  place  it  is  evident  that  the  prices  of  the  same 
article  in  different  markets  act  and  react  on  each  other. 
Thus,  the  price  of  wheat  in  Chicago  affects  the  price  of  wheat 
in  N<:w  York,  Liverpool,  and  dsewhere.  The  fact  that  wheat 
can  \yt  tranqxirted  quickly  and  cheaply  from  one  market 
to  another  prevents  the  possibility  of  great  differences  in 
prices.  Any  a»siderable  difference  in  prices  between  two 
markets  sudl  m  CUa^  and  New  York  will  soon  correct 
itself  throo^  the  transportation  of  wheat  from  the  cheaper 
to  the  dearer  market.  If  all  communication  between  the 
couki  be  cut  off  so  as  to  jmvent  absdiutely  such 


334  xuKXNxAiY  nmapLib  ot  loomoMa  Fr^r  Ttvni 

tnaiportation  of  wheat,  the  supply  and  fiMMf^i^ 

or  curves  in  each  market  would  be  mde|u  ndent  of  those  in 
tt«otteI^and  the  resultant  prices  in  the  two  would  fluctuate 
MMpendentfy  of  each  other.  But,  given  cheap  and  rapid 
transportation,  the  supply  and  demand  in  one  ma^  wOl 
dosely  affert  and  be  affected  by  the  supply  and  demand  in 
the  other,  and  there  wili  be  a  tendency  toward  equaUzation 
^  5    .  J^.  the  two  this  tendency  to  equalization  works 
Itself  out  chiefly  through  a  special  dass  of  men  who  make 
It  their  business  to  watch  prices  in  different  markets,  en- 
deavormg  always  to  buy  in  the  cheaper  and  seU  in  the 
d|»rer.  Such  transactions  are  called  arbitrage  transactions 
These  men  engage  in  the  business  of  aifrftrage  in  Older  to 
take  advantage  of  price  differences;  and  whUe  it  is  not 
their  object  or  wish  to  equalize  prices  (for  it  is  on  the  in- 
equalities of  prices  that  they  live),  nevertheless,  to  equalise 
pnces  IS  the  effect  of  their  action. 
^  Suppose,  for  instance,  that  the  price  of  wheat  in  Chicago 
IS  75  cents  per  bushd  and  in  New  York  |i  a  bushd.  Such 
a  situation  offers  an  opportunity  for  an  arbitrage  merchant 
to  make  money  rapidly  by  buying  wheat  in  Chicaffo  at  »< 
cents  and  selling  it  in  New  York  at  $i.   He  tiierefbre  appewi 
in  Chicago  on  the  demand  side  of  the  market,  bdng  willing 
to  take  a  large  amount  of  wheat  at  75  cents  per  bushd.  He 
appears  m  New  York,  on  the  other  hand,  <m  the  supply  side 
of  the  market,  being  willing  to  seU  a  large  amount  of  wheat 
at  »i  per  bushd.   Thus  he  increases  the  demand  for  wheat 
to  Chicago  and  increases  tiie  supply  in  New  York.  The 
effect,  as  we  have  sten,  must  be  to  increase  the  price  in 
Chicago  and  decrease  the  price  in  New  York. 

The  former  may  rise  from  75  cents  to  80  cents  per  bushd. 
and  tiie  latter  may  fafl  from  ft  to  95  cents  per  bushd.  But. 
even  at  these  prices,  the  arbitrage  merchant  wfll  be  able  to 
reap  a  rich  harvest  and  will  con^^nue  to  do  so  until  tiie  dif- 
ference in  price  is  suffidentiy  reduced.  Instead  of  tiie  prices 
remaining  80  cents  and  95  cents,  tiiey  become,  let  us  say. 


•k  4  WnUJOJUt  BL4BD  fUCIt 


335 


82  cents  and  93  cents  and  then  84  cents  and  90  cents.  TUt 
teavci  tlw  merdiaat  a  naiiiB  or  dIffeNaea  ct  only  6  c«ta. 

But  as  the  cost  of  tnuMporting  wheat  from  Chicago  to  New 
York  is,  we  shall  suppose,  about  6  cenU  per  bushel,  there 
is  no  longer  profit  to  the  arbitrage  merchant,  and  thus  the 
equaUsatioa  of  pikct  will  be  United  by  the  coat  ol  tnaa- 
porUtion.  Tbe  pike  in  New  York  can  never  be  above 
that  in  Chicago  by  more  than  6  cents  per  bushel.  For 
dmliar  ressons,  the  prices  in  Chicago  cannot  exceed  those 
in  New  Yoik  by  moie  tfaaa  tiie  coat  of  tiaiMportttioo; 
otherwise  the  arbitrage  merdunt  would  bay  wheat  in 
New  York  and  sell  it  in  Chicago. 

It  is  by  such  arbitrage  transactions  that  the  prices  of  the 
same  commodity  fai  different  markets  seek  a  comaaon  level, 
just  as  water  flowing  from  one  reservoir  to  another  tends  to 
equalize  the  levels  of  the  two.  The  more  the  costs  of  trans- 
portation are  reduced,  the  more  nearly  equal  will  the  prices 
of  any  commodity  in  different  maikets  becoaae.  WHh 
the  progress  of  civilization,  and  eq;)ecially  with  the  improved 
means  of  transportation  by  railway  and  steamships,  the 
equalization  of  prices  of  transportable  goods  has  proceeded 
with  great  rapidity.  The  oonuaerdal  woild  stiD  conrista 
of  a  number  of  sq>arate  markets,  but  the  communication 
between  these  markets  is  becoming  constantly  more  cheap 
and  rapid,  so  that,  in  a  sense,  the  whole  world  ahnost  forms 
one  great  market  for  certain  st^des  l&e  wheat,  other  grdns, 
and  the  precious  metals.  For  articles  which  are  difficult  of 
transportation,  bulky,  and  otherwise  subject  to  expenses  of 
transportation  large  relatively  to  their  value,  the  tendency 
to  the  equalization  of  prices  b  less  striking.  This  is  purtic- 
uhurly  true  of  human  services  by  "  labor,"  which  can  only 
be  transported  through  migration.  Nevertheless,  there  is 
a  constant  tendency  for  migration  to  take  place  in  order 
to  take  advantage  of  differeiKes  in  the  price  of  labor.  BeA 
Hnt  European  and  Oriental  workmen  often  leave  their  low 
wages  f<»  the  hitler  wages  in  America  or  other  new  oountziea. 


Mnocorv  «esoiuTioN  lesT  chabt 

(ANSI  and  ISO  TEST  CHART  No.  2) 


/^PPLED  IM/^E  Inc 

;653  East  Moin  Slr«t 

Rochester,  N«»  YorV      I*«09  US* 

(716)  482  -  0300  -  Ption* 

(716)  288  -  59B9  -  ra» 


336  uziiSMTAxy  nmciPLES  or  BOONOiiics  (Cmxvui 

Before  the  days  of  rapid  transportation  it  was  not  uncom- 
mon for  wheat  to  oommaod  Camine  prices  in  one  country 
while,  at  the  nme  time,  it  was  a  ghit  on  the  maiket  k 
another. 

It  is  evident  that  the  equalisation  of  prices  is  an  advan- 
tage to  the  world  as  a  whole,  for  it  is  better  that  there 
diould  be  a  moderate  supply  of  wheat,  and  therefore  of 
bread,  throughout  the  world  than  that  there  should  be  in 
some  places  feast  and  in  others  famine.  Therefore  the 
intercommunication  of  markets  and  the  resulting  equaliza- 
tion of  prices  must  be  regarded  as  an  advantage  to  society. 
It  do^  not  foUow,  however,  that  it  is  an  advantage  to 
every  individual  in  society. 

For  instance,  when  the  fertile  lands  of  the  Mississippi 
VaUey  were  tapped  by  buflding  railways  from  the  Eas^ 
the  cheap  wheat  from  these  lands  began  to  enter  the  markets 
of  the  East,  where  the  price  of  wheat  had  been  relatively 
Ml^i.  The  result  was  to  lower  the  price  of  wheat  in  the  East 
This  reduction  in  price  injured  the  New  England  farmer. 
Such  injury  of  mdividuals  ahnost  inevitably  happens  with 
every  economic  readjustment  of  conditions.    Rapid  and 
cheap  transportation  by  connecting  aU  lands  and  countries 
has,  m  spite  of  tiie  general  good  accon4)lished  for  the 
world  as  a  whole,  injured  great  groups  of  producers  by 
subjecting  tiiem  to  competition  from  which  tiie  barriers  of 
nature  had  prevwusly  protected  them.    These  producers 
have  therefore  asked  the  government  to  protect  them  hy 
raising  artificial  barriers  in  place  of  tiie  natural  barriers 
which  have  been  destroyed,  and  tixe  protective  tariff  has 
•8  its  chief  source  of  popularity  tiie  fact  tiiat  it  protects 
the  local  producer  of  particular  articles  against  the  importa- 
tion of  such  articles  from  abroad.   The  poKcy  of  protection 
IS  thus  an  attempt  to  interfere  with  the  equalization  of 
prices  irtdch  the  inqwovement  in  tran^rtation  is  con- 
■tantiy  producing. 

But  just  as  tUs  piQgraBB  of  equalisation  of  prices  creates  a 


Ssc.  il 


MUTUALLY  BELATKD  PBICB8 


337 


Special  injury  to  some  particular  producers,  it  creates  special 
benefits  to  others.  The  transcontinental  railways  have  not 
only  injured  the  owners  of  the  rocky  farms  in  New  England, 
but  have  vastly  benefited  the  owners  of  the  alluvial  lands  in 
the  Mississippi  Valley ;  for  they  have  given  them  an  oppor- 
tunity to  sell  their  products  to  advantage  in  the  more  rocky 
parts  of  the  world.  In  general  we  may  say  that  the  equal- 
isation ci  pacu  constantly  going  on  through  improvemeat 
in  transportation  facilities  injures  the  producer  in  those 
regions  where  prices  were  previously  high,  but  benefits  the 
producer  in  regions  where  tlwse  prices  were  previoustjr 
low.  The  lomMT  group  have,  therefore,  an  interest  in  pro- 
tection ;  the  latter,  an  interest  in  freedom  of  trade :  the 
one,  an  interest  which  tends  to  prevent,  and  the  other,  an 
interest  which  tends  to  promote,  the  intercommiinication 
of  maikets.  Anumg  consumers,  on  the  other  hand,  of^XMite 
results  ensue.  Those  particular  consumers  who  were  enjoy- 
ing the  lowest  prices  are  injured  by  the  rise  which  equalisa- 
tion brings  to  them,  while  those  who  had  to  pay  high  prices 
are  boM&ted  by  the  fall  which  equalizatkm  Inbigs  to  them. 
In  general,  the  inevitable  effect  on  society  as  a  whole  is  a 
gain,  for  the  reason  that  a  larger  quantity  of  goods  is 
obtained  with  a  smaller  expenditure  <A  effort  It  is  evi- 
dently more  economical  for  the  world  to  grow  its  wheat 
in  the  Mississippi  Valley  than  on  the  refractory  soil  of 
New  England,  and  the  transportation  facilities  which  have 
brought  about  this  condition  have  been  ci  the  sanw  natuie 
as  kAMMT-saving  machinery. 

It  is  not  within  the  scope  of  this  book  to  discuss  the  argu- 
ment for  or  against  the  protective  tariff,  but  the  student 
can  at  this  point  realize  that  the  movenmit  for  prolectkiik 
b  of  ^  ttune  nature  as  the  movement  against  labor-savii^ 
machinery,  which  is  a  protest  against  the  cheapening  pro- 
cesses which  come  from  inventions,  the  protest  being  made 
by  the  spedal  interests  whiph  are  injured  by  the  intndaGliM 


538    SLXKENTASY  nZNCIPLIS  OV  BCOMOMICS  ICbat.  XVm 


§  a.  ^ecttlttioo 

We  have  spoken  of  the  equalization  of  prices  as  between 

different  places.   We  have  next  to  consider  equalization  of 
prices  as  between  different  times.    Corresponding  to  the 
tendency  to  the  equalization  of  the  prices  of  a  given  com- 
modity between  different  places,  that  is,  between  the  places 
where  it  is  abundant  and  cheap  and  the  places  where  it  is 
scarce  and  dear,  there  exists  a  tendency  to  the  equalization 
of  the  prices  of  a  given  conmiodity  at  different  times.  More- 
over, the  method  of  equalization  of  prices  between  times 
corresponds  somewhat  to  the  method  of  equalization  of 
prices  between  different  places.   Just  as  the  equalization 
between  places  is  accomplished  by  the  transportation  of 
commodities,  so  the  equalization  between  times  is  accom- 
phshed  by  keeping  the  commodity  from  the  time  when 
It  IS  abundant,  and  therefore  cheap,  to  the  time  when  it  is 
scarce,  and  therefore  dear.  For  instance,  ice  is  abundant 
and  cheap  in  winter,  but  scarce  and  dear  in  summer.  Con- 
sequently  much  of  it  is  stored  in  ice  houses  in  winter  and 
kept  for  use  in  the  summer ;  that  is,  the  part  which  is  thus 
stored  ia  subtracted  from  the  winter  supply  and  added  to 
the  summer  supply.  The  effect  tends  to  equalize  the  prices 
of  ice  at  different  seasons.   In  the  same  way  many  vege- 
tables and  fruits,  such  as  potatoes  and  apples,  which  are 
abundant  and  cheap  in  the  summer  and  faU,  are  to  a  large 
extent  stored  for  use  in  winter  when  they  will  be  scarce  and 
dear    The  effect  is  to  subtract  a  certain  quantity  from  use 
in  the  summer  and  f  aU  and  to  add  to  the  amount  used  in 
thewintor. 

Just  as  the  equalization  of  prices  between  places  is  largely 
due  to  the  work  of  a  special  class  of  business  men  who  engage 
toarbitr^e  transactions,  so  the  equalization  of  prices  be- 
tween different  times  is  largely  accomplished  by  a  special 
class  caUed  speculators.  A  wheat  speculator,  for  instam 
withdraws  wheat  from  the  madcet  when  it  k  abiiiidantiinl 


Sac.  s] 


KDTUAIXY  XlLAfID  ¥KBCMB 


339 


cheap,  and  supplies  it  when  it  is  scarce  and  dear.  At  the 
former  times  he  appears  <m  the  demand  nde  of  the  market 
as  a  wheat  buyer ;  at  the  latter  he  appears  on  the  supply 
side  as  a  seller.  By  adding  to  the  demand  when  the  price 
is  low,  he  tends  to  raise  prices,  and  by  adding  to  the  supply 
when  the  price  is  high,  he  tends  to  lower  prices,  thus  acting 
as  an  equalizing  agent. 

We  need  to  distinguish  two  chief  kinds  of  speculation 
according  as  the  price  of  the  given  commodity  is  expected  to 
rise  or  fall.   Speculators  who  try  to  profit  by  any  expected 
rise  of  price  are  called  "  bulls,"    Their  operations  consist 
simply  in  buying  wheat  in  the  present,  keeping  it  until  the 
future,  and  then  selling  it  again  at  higher  prices.  Specu- 
lators, on  the  other  hand,  who  try  to  benefit  by  an  ex- 
pected fall  in  pncM  are  called  "  bears."   Tbgk  <^>arations 
are  somewhat  more  complicated.   It  is  easy  to  decrease  the 
present  consumption  of  any  commodity  and  increase  corre- 
spondingly futxire  consumption,  i.e.,  to  withdraw  certain 
stodu  and  hold  them  until  the  future.    But  wbm  the 
reverse  operation  is  needed,  namely,  to  increase  present 
consumption  at  the  expense  of  futiure,  the  operation  is  more 
difGlcult.  We  cannot  lay  hold  <d  a  future  sboA  of  wheat 
bdioe  it  exists.  The  best  we  can  do  is  to  use  up  our 
{Mresent  wheat  as  completely  as  possible.    This  is  what  is 
needed  when  prices  are  falling.  Speculators  will  then  add  to 
the  present  supply  by  selling  out  any  stocks  from  previous 
hidings.  They  and  all  who  deal  in  wheat  wiU  refrain  as  far 
as  possible  from  intentionally  carrying  over  any  of  the  pres- 
ent stock  of  wheat  into  the  period  when  they  expect  it  to  be 
abundant,  and  therefore  cheap.  But  this  is  not  all ;  the 
speculators  will  also  speculate  for  a  fall  by  "  selling  future 
wheat  short."   This  operation  of  "selling  short "  consists 
in  agreeing  to  sell  wheat  in  advance  of  the  time  of  delivery, 
depending  on  its  expected  fall  in  price  to  enable  them  to  se- 
cure the  wheat  in  time  to  fulfill  their  contracts.  It  is  called 
"MBiBg  dnrt,"  beanise  tttt  ipeculatoCT  are  sdlii^  sooae* 


34©   BUMBHXASY  fSINCIPtU  0»  ICONOIIICS  K^Mt.XVm 

r?^'^L?*y     ""^^      P°^'      of  which  they  are 
short "  The  specidator  who  seUs  short  hopes  to  make  a 
profit  by  buymg  at  a  lower  price  than  the  price  at  which 
he  sdls  short.    If,  for  instance,  in  January  the  price  of 

J^Lh  *  ^"^^^^  J"ly  wheat,  that 

to,  wheat  ddiveraUe  in  July,  at  90  cents  a  bushel.  This  is 
because  he  expects  that  when  July  comes,  wheat  will  be 
worth  l«s  than  90  cents  a  bushel,  say  85  cents,  so  that 
he  can  buy  it  for  85  cents  and  sell  it  immediUely  to  his 
customer  for  the  90  cents  previously  agreed  upon. 

The  effect  of  seUing  wheat  short  is  to  encourage  stiU 
further  the  using  up  of  present  suppUes,  the  speculator  thus 
guaranteemg  the  deUvery  of  wheat  to  those  who  buy  of 
him  so  that  these  persons  wiU  not  need  to  accumulate  the 
wheat  m  advance  for  themselves.   Of  course,  the  speculator 
must  take  good  care  that  the  wheat  is  avaUable  at  the  tune 
agreed,  but,  being  presumably  an  expert  as  to  the  conditions 
of  wheat  sappfy,  he  can  manage  to  get  the  wheat  in  the  nick 
of  time  or,  at  any  rate,  with  less  preliminary  accumuUtion 
than  those  who  are  not  experts.   The  effect  is  therefore  to 
obviate  the  necessity  of  any  one's  keeping  wastefully  on  hand 
any  large  stock.  Where  such  a  specuktive  market  exists,  a 
imller  can,  when  wheat  is  scarce,  use  up  his  existing  stock 
without  replenishing  it  until  the  last  minute,  at  which  time 
he  has  the  assurance  of  those  who  have  sold  him  wheat  short 
that  the  wheat  wiU  be  on  hand.  Without  such  assurance 
from  experts  m  wheat  speculation,  the  miller  would  have 
feared  to  have  run  his  stock  so  low  and  would  have  laid  in 
wheat  m  advance  even  at  high  prices.  He  defers  his  stodc- 
ing  up  by  means  of  the  short  aelHng  of  wheat  to  him  by  the 
q)eculator. 

Inthe  same  way  a  woolen  manufacturer  is  enabled  in 
a  ipecabtive  market  to  lay  in  his  supply  of  wool  in  the 
most  advantageous  manner.  U  the  price  of  wool  b  faU- 
lag,  he  will  wait  before  stocking  up,  merely  contracting 
m  advance  with  a  speculator  for  the  immA^jatf  ddivay  of 


9k.  »]  MUTUilLLY  ISLAIID  lUCn 


new  wool,  when  his  present  stock  is  exhausted.  In  the  same 
way  builders  use  the  speculati\^  market  to  t-suie  them- 
•dm  of  buildiiig  materiab  when  needed.   The  builder 
amrngf*  in  advance  with  dealers  in  building  materials 
for  the  delivery  to  him  of  the  lumber,  bricks,  and  stones 
needed.    By  thus  selling  short  or  making  onitncts  for 
ddivery  in  advance  of  possession,  and  sometimes  even 
in  advance  of  the  actual  existence  of  the  commodity 
sold,  there  is  a  great  saving  accon^lished  in  the  stocks 
which  need  to  be  carried.  Without  such  selling  of  fatnns 
tbe  miller,  tlie  woolen  manufacturer,  the  bulkier,  wad 
great  dassies  of  merchants  would  be  under  the  necessity 
of  carrying  far  larger  stocks  than  they  now  carry.  In 
other  words,  the  speculative  operation  known  as  selKng 
dKWt  enaldes  the  camaxadty  to  economize  its  capital  exist- 
ing in  the  form  of  accumulatftd  stocks  of  goods,  especially 
at  times  when  these  goods  are  scarce  and  dear  and  most 
need  to  be  economized.  This  selling  short  has  the  effect  of 
deferring  the  demand  for  a  commodity.  The  iriller,  the 
woden  manufacturer,  the  builder,  and  all  others  who  buy 
futures  —  the  wheat,  the  wool,  the  building  materials,  etc.  — 
do  so  instead  of  buying  present  wheat,  wool,  biiilding  mate- 
rials, etc  The  fact  that  they  find  a  speculative  market  in 
whidi  they  can  buy  futures  has  therefore,  as  its  effect,  less 
buying  in  the  present.   In  other  words,  it  reduces  the  pres- 
ent demand,  and  therefore  reduces  the  present  price,  wfafle 
it  iocnuM  tiie  future  demaikl  and  the  future  price.  Thus 
it  tends  to  reduce  the  gap  between  the  presciic  high  prices 
and  the  future  low  prices. 

But  while  speculation  normally  tends  to  mit%ate  cither 
an  impending  rise  or  faQ  (rf  prices,  its  power  to  do  so  it 
limited,  just  as  is  the  power  of  equailiring  prices  among  <^ 
ferent  places  by  arbitrage.  The  latter  operation  does  not 
pay  whoi  the  difference  in  price  is  reduced  to  the  cost  of 
trampcffting  from  jdace  to  place.  Likewise  speculation 
does  not  pqr  iHiea  ^  caqwetad  difimm  in  prios  beoQBM 


tootBttU  0»»  of  the  coiti  to  the  speculator /«r  a  m«  » 
fiiierest  on  the  capital  he  locks  up  wluai  he  withdraws  a 

commodity  from  the  market  and  holds  it  for  a  certain  period. 
Suppose,  for  instance,  that  he  borrows  money  in  order  to 
■peculate  for  a  rise.  The  anticipated  rise  must  be  sufficient 
to  cover  themterest  he  paysandaUtheother  costs  involved 
in  the  operation.    Otherwise  the  speculation  promises  a 
loM  mstead  of  a  gain.  Likewise,  if  he  is  to  speculate  for 
a/a»,  hemust  anticipate  a  fall  suffidenUy  below  the  price 
at  which  he  seUs  short  to  enable  him  to  make  a  profit 
Speculation,  therefore,  is  a  function  in  equalizing  prices 
between  tunes,  very  analogous  to  the  function  of  arbitrage 
tr:   -actions  m  equalizing  prices  between  different  places. 
h^.  there  is  one  important  distinction  between  speculation 
and  arbitrage.   Speculation,  by  the  nature  of  the  case,  in- 
volves  uncertainty  in  a  far  greater  degree  than  arbitrage, 
m  pnces  among  different  places  can  easily  be  known,  but 
the  pnces  between  different  times  are  far  more  difficult  to 
know,  for  the  future  is  always  uncertain.  All  we  can  do  is 
to  predict  according  to  the  best  information  we  can  get  It 
thoeforeoften  happens        r    peculator  makes  a  mistake 
in  his  forecast  of  the  i-  ^e  may  befieve  that  prices 

are gomg  to  nse  when  thc>  ...  ^oing  to  fall,  or  to  fall  when 
they  are  going  to  rise  li,  acting  on  a  mistaken  beUef  that 
prices  are  nsmg,  he  holds  wheat  for  a  rise,  the  result  of  his 
acbon  wiU  be  to  aggravate  the  faU;  for  buying  in  the  present 
will  raise  prices  now  when  they  are  already  high,  and  sellinir 
m  the  future  wiU  lower  them  then  when  they  will  be  low 
In  like  manner,  if  he  makes  the  mistake  of  selling  short  when 
pnces  are  rising,  he  wiU  aggravate  the  rise,  for  he  wffl  lower 
the  prices  m  the  present  when  prices  are  already  low  and 
raise  them  m  the  future  when  they  are  already  high. 

Therefore  speculation  may  do  either  good  or  harm  It 
does  good  when  it  reduces  the  inequaMty  of  prices  at  different 
times.  It  does  hann  when  it  aggravates  this  inequaKty. 
fortunately,  the  interests  of  the  speculator  and  the  pobfie 


are  to  a  large  extent  identical.  It  is  evident  that  when  the 
speculator  is  cmct  in  Us  prognosticatioQi,  he  nffl  mak* 
a  profit.  His  object  is  to  make  a  profit  when  prices  are  rising, 
but  he  can  do  so  only  by  mitigating  the  rise.  Likewise  his 
object  is  to  make  a  profit  when  prices  are  falling,  but  he  can 
do  so  only  by  mitigating  the  fall.  His  profits  are,  as  it  were, 
a  reward  paid  him  by  the  commimity  for  mitigating  price 
changes.  If  he  makes  a  mistake  in  either  form  of  specula- 
tion, he  suffers  losses,  and  these  losses  may  be  regarded  as 
a  sort  of  penalty  he  suffers  for  aggravating  the  inequafitlea 
in  prices.  Since  the  interests  of  the  speculator  and  of  the 
public  are  thus  parallel,  there  is  a  premium  put  on  wise  and 
beneficial  speculation  and  a  penalty  on  unwise  and  injurioua 
speculation. 

It  is  unfortunately  true,  however,  that  in  ^te  oi  the 
penalties  for  imwise  and  injurious  speculation,  much  specu- 
lation is  of  this  character.  This  is  largely  due  to  the  fact 
that  many  engage  in  speculation  who  hvrt  ao  a^teqnate 
equi^mait  for  so  doing  and  no  independent  judgment  as  to 
the  causes  making  for  a  rise  or  a  fall  in  prices.  The  ultimate 
justification  for  speculation  must  rest  in  the  wisdom  and 
independence  of  those  who  speculate.  SpecuUttioii  wUdi 
meidy  lolkiws  a  "tip"  has  no  independent  value.  If 
every  person  who  speculates  for  a  rise  or  a  fall  shotild  do  so 
on  a  basis  of  his  own  best  indq)endent  judgment,  the  chances 
are  that  mistakes  of  those  idw  axe  overoonfideat  in  dXbm 
directicm  would  largdy  offset  each  other. 

During  recent  years  the  general  public  have  been  beguiled 
into  the  folly  of  entering  the  speculative  market,  but  the 
public  have  no  spedal  knowledge  of  market  cooditioitt,  and 
tbffhr  part^pation  in  speculation  is  almost  as  apt  to 
aggrava^  as  to  alleviate  the  inequalities  in  prices.  In  such 
ones  speculation  becomes  mere  gambling.  In  fact,  it  is 
worse  than  gambling,  f<»r  the  evfls  axe  more  extensive,  being 
shared  by  the  consumers  and  producers  and  all  who  are 
agected  by  the  price  flttctoations  thus  caused*  SttdievHsaf 


344    lUaiSMfMlY  WNCVUi  OV  ■'^tiniM  (QurXYID 


1*"'l**fa'>  «•  wpedally  grave  when,  aa  usually  happens, 
the  general  public  speculate  in  a  mass,  i.e.,  all  in  the 
direcUon.  Like  sheep,  they  tend  to  foUow  thf  same 
leader,and  the  great  bulk  of  their  mistakes  are  apt  to  be  in 
the  same  directkm,  first  in  one  direction  and  then  in  the 
other.  The  effect  of  their  movements  is  like  that  ol  a 
sudden  rush  of  the  passengers  of  a  ferryboat  first  to  one 
side  and  then  to  the  other,  — it  may  cause  a  capsize. 

We  see,  then,  that  the  chief  evib  of  speculation  are  largely 
the  work  of  the  unprofessional  specuktors,  just  as  the  chief 
evils  of  reckless  automobile  driving  are  due  to  untrained 
chauffeurs.  It  must  not  be  supposed,  however,  that  the 
professional  speculator  is  ahrays  a  public  benefactor.  Not 
only  may  he  also  make  mistakes  which  cost  him  and 
society  dear,  but  he  may  sometimes  "rig  the  market"  and 
maoxpulate  prices.  When  a  professional  speculator  merely 
•tUmpts  to  take  advantage  of  an  hnpending  rise  or  fall  of 
prices,  he  is  usually  a  public  benefactor;  but  when  he 
attempts  to  create  the  rise  or  fall,  of  which  he  is  to  take 
advantage,  by  false  reports,  .by  "cornering,"  or  by  other 
means,  he  is  apt  to  be  a  mischief-maker. 

This  is  not  the  place,  however,  to  discuss  the  benefits  and 
evils  of  speculation  further  than  to  warn  the  student  against 
the  wholesale  condemnation  of  speculation  so  common  in  the 
public  press.  Like  most  other  industrial  operations,  specula- 
tion may  be  either  good  or  bad.  So  far  as  it  is  good  or  bad, 
the  discussion  of  the  two  belongs  to  applied  economics.  Our 
object  here  is  to  show  that  speculation,  so  far  as  it  is  aood 
tmdi  to  equalize  prices  in  time.  ' 

S3-  Met  ol  Goods  wUdi  Compete  OB  tlM  Dannd  aidt 

At  a  result  of  our  study  of  arbitrage  and  of  speculation, 
we  see  that  the  price  of  any  particular  commodity  at  any 
time  and  place,  though  directly  fixed  by  its  supply  and  de- 
mand at  that  time  and  place,  is  indirectiy  affected  by  the 


Sk.j1  mutually  MXuagD  nzcii 


wapffy  tad  demand  at  other  times  and  placet;  for  these 
react  upon  ^  jpply  and  demand  at  the  pa'tt><Jar  time  and 
place  under  consideratitm.  The  price  of  \  ^t  in  Chicago 
on  January  i,  191a,  is  determined  by  the  hitmectioii  of  the 
wap^  and  demand  curves  in  Chicago  on  that  date ;  but 
those  supply  and  demand  cui  ves  depend,  as  we  now  see,  upon 
the  price  of  wheat  in  St  Louis,  New  York,  Liverpool,  and 
other  places,  and  depend  likewise  on  the  piket  of  wheat 
on  dates  before  and  after  January  first.  The  price  of 
wheat  in  Chicago  on  January  first  tends  to  be  close  to 
the  price  of  wheat  in  neighboring  pku:es  and  at  neighbor- 
ing times. 

Not  only  does  the  supply  and  demand  of  wheat  at  any 
time  or  place  depend  upon  the  price  of  wheat  at  other  times 
and  pUces,  but  it  depends  likewise  on  the  prices  of  other 
things  than  wheat.  In  particular  the  price  of  wheat  de- 
pends on  the  prices  of  substitutes  for  wheat.  Substitutes  for 
wheat  will  resemble  wheat  in  affecting  the  price  of  wheat, 
but  the  effect  will  not  be  so  direct  if  the  substitutes  are  only 
substitutes  on  one  side  of  the  maiket;  for  hutance,  if  they 
axe  like  wheat  so  far  as  the  use  to  tht  co  ^^'omer  is  concerned, 
but  unlike  wheat  so  far  as  the  cost  to  the  producer  is  con- 
cerned. Thus  sugar  and  h uney  are  stdMti^  ^tes  for  each 
othor  to  the  oonmimer,  for  they  serve  ikttKm  Meds  lo  lir 
M  tibe  oooBumer  is  concerned,  though  oa  wm  iq^pi^ 
they  are  produced  in  totally  different  «  yt. 

Two  sorts  of  wealth  are  said  to  be  substi*^  on  the  de- 
mand side  when  they  fill  sindlar  needs.  1^  ^at  i  t 
iatisfacd(m  ci  needs  by  one  of  the  two  sub  t&  not  only 
reduces  its  marginal  desirability,  but  affectt  marginal 
desirability  of  the  other  in  a  similar  fashion.  L  ««sequently, 
the  marginal  desiraUlities  of  the  two  tend  t»  #9  or  die  in 
unison.  Therefore  also  the  prices  of  the  two  tet  to  fal  of 
rise  in  unison.  It  is  evident,  for  instance,  tha  e  prif  * 
of  coal  will  affect  the  demand  for  coke,  since  coai  '  ^c^e 
aie  often  substitutes,  or  competing  articles,  tp  ^ 


346    ILIMINTAXY  PlTOdPUM  Of  ICONOIOCS  IC»l».XVin 

nearly  dther  of  the  two  articles  comes  to  fillinff  the  oAce 
of  the  other  the  more  closely  do  their  prices  keep  ^ 
wiA  eich  oUier.  If  two  arUdes  are  absolutdyTSJ^J 
subsututes  they  are,  to  dl  tatent.  «id  purpose.,  Ui^e 
article,  and  have  the  same  price. 

S2^^  fuel  subadtutes,  coal  -ad  coke,  include 

numeroiL-  lubclasses  and  varietle.,  such  as  anthracite  and 

bitummous  coal    Other  fuel  substitutes  are  wood,  petio- 

any  one  of  these  tends  to  produce  a  similar  cL.n/in  the 
pnces  of  the  rest.  Likewi*  the  prices  of  food  substitu^ 
are  sympatheUc  among  themselves  -  the  prices  of  such  tub. 

and  fowl;  of  the  various  fruits  and  the  various  vegeubles 
!^  '^J^P^tl^^tic  relation.  «d.t  among  dothhig  .ut 
swutes,  sudi  as  woolen,  cotton,  Unen,  and  silk ;  or  Lnong 
^a^  substitute.,  sudi  a.  diamond.,  pearl.,  ruWe.,  S 

<n,S!K?T*  »tffl  suffidently  diitin. 

gu«hable  to  prevent  their  b^ing  quite  dassed  as  L  ume 
article,  are  the  vanous  "  qualities,"  "  grades,"  or  "  brands  " 
ofjiny  partfctdM  daM  of  artides.  The  various  breakfast 
foods  prepared  from  wheat  are  dow  substitutes.  Tlierr 

sugar,  of  coflfee,  of  meat,  of  Ok, 
and,mfact.of  ahnostany  dassof  articles  which  canbenamed! 
Am^diffmt  grades  the  pricesare  usually  so  dosely  paral- 
Id  that  trade  journals  often  ghre  the  price  of  one  staple  grade 
only  —  as  of  a  standard  grade  of  coffee  -  leaving  it  to  the 

Bnt  the  prfc«i  of  different  quaUties  of  any  good,  though 
Aey  nse  and  fall  together,  may  be  wide  apart  Imoig  th^ 
aelves.  Vanous  quaUties  of  land,  for  instance,  bring  very 
d^cmit  pnces,  rangiAg  from  almost  nothing  to  thousands 
2^oBan  pa- square  foot.  When  Uie  various  "qualities" 
3«d  precBcly  the  Mme  wrt  of  benefit,  the  only  difference. 


lK.41  mrruALLY  bslated  puoi 


■moog  than  an  dUteencn  in  the  quantitie«  of  benefiU 
which  flow  from  them.  In  this  case  the  prices  of  the  goods 
will  evidently  be  proportioned  to  the  net  benefiU  they  yield. 
Wheat  lands,  for  instance,  of  different  iertllity,  yriSi  bt  worth 
prices  proportion^  to  th«  net  vihie  of  wheat  whkh  thqr 
yield. 

I  4.  Price  ■      'ioode  which  are  Complementary  on 
flM  Demand  8ido 

Substitutes  may  be  said  to  compete  with  each  other.  We 
now  consider  articles  which  compleU  each  other  or,  k 
other  woide,  are  complementary.  Complementary  .  rtides 
jointly  serve  the  same  want.  We  have  seen  that  of  two 
substitutes  one  is  used  instead  of  the  other  for  a  given  pur- 
pose. But  of  two  complementary  articks  cme  ?•  need  In 
CMt^MiKftosvdA  the  other  for  a  given  porpoee.  Hones  and 
milks  are  substitutes,  so  far  as  either  may  be  used  for 
the  purpose  of  drawing  loads.  A  horse  and  a  cart  are 
con^ementary,  for  this  same  purpose. 

We  have  seen  that  the  essential  attribute  of  substitutes 
is  the  tendency  of  their  marginal  desirabilities  to  keep 
pace  with  each  other,  and  the  consequent  tendency  of  their 
prices  ♦o  correspond.  In  the  case  of  compfementary  artfcka 
it  is  ttae  quantUies  of  the  articles  which  tend  to  maintain 
a  constant  ratio.  In  the  case  of  perfect  substitutes  the  ratio 
of  their  prices  is  absolutely  constant.  In  the  case  of  perfect 
complementary  articles  it  is  the  ratio  of  the  units  used  that 
is  absohitdy  constant  Table  knives  and  foite  are  practi- 
cally perfect  complementary  articles,  as  are  cups  and  saucers 
or  "  hooks  "  and  "  eyes."  A  "  hook  »  without  an  "  eye  " 
is  of  little  or  no  use  and  the  number  of  "  hodcs"  and  the 
number  of  "eyes"  win  always  be  sobatantiaUy  equal. 
Ihe  prices  of  tvvo  substitutes  tend  to  move  sympathetically, 
but  the  prices  of  two  complementary  articles  tend  to  move 
inversely.  If  horses  are  abundant,  and  tihenloKe  dieap, 


xvm 


34*    SLBMENZAKY  niNCIPLES  OF  lOOMOillCS  [Chap. 

the  tottdency  is  to  make  mules,  which  are  a  substitute,  cheap 
aiao,  but  to  make  the  complementary  carts  dear;  for  the 
more  horses  used,  the  more  carts  wffl  be  needed,  and  the 
increased  demand  for  them  will  tend  to  raise  the  price 

Articles  which  are  related  to  each  other  in  this  comple- 
mentary fashion  are  ahnost  as  common  as  those  which  are 
related  to  each  other  in  competitive  fashion.  Various  articles 
of  food  are  used  in  combination,  as,  for  instance,  bread  and 
butter,  or  the  elements  of  which  a  sandwich  is  composed. 
A  daJy  diet  is  usuaUy  constructed  with  regard  to  the  fittine 
together  of  the  different  courses  served,  and  of  the  meals 
as  a  whole.  Similarly,  the  various  parts  of  one's  wardrobe 
are  arranged  with  reference  to  one  another;  and  again,  a 
dwelling  and  its  various  furnishings  are  mutually  adapted. 

crockery,  knives  and  forks,  beds 
and  bedding,  rugs  and  waU  paper,  are  severally  arranged  in 
retetion  to  one  another  in  their  respective  groups,  and  to  the 
House  to  which  they  all  constitute  a  compl-ment. 

§5.  mmSlu  Rektioiu  on  the  Simply  Side 

TTius  far  we  have  considered  only  goods  which  compete 
with  ^ch  other,  or  complete  each  other,  in  respect  to 
demand.  Turning  now  to  the  supply  side  of  the  market 
we  find  similar  relations. 

Two  goods  compete  in  supply  when  they  occasion  similar 
efforts  or  costs  to  those  who  seU  them.  Thus,  hay  and 
wheat  -  though  far  from  being  substitutes  on  the  demand 
^^^^^^y^S  dissimilar  wants -are  to  some  extent  sub- 
stftates  on  the  supply  side,  for  they  require  similar  costs. 

Both  lequhe  the  use  of  farm  hnd  and  the  labor  of  mowing 
or  reaping.  The  prices  of  such  articles  competing  in  supphT 
hke  those  of  articles  competing  in  demand,  tend  to  rise 
or  faa  together  because  their  costs  tend  to  rise  or  fall 
together.  The  best  example  of  competition  of  costs  is 
found  in  the  service  of  kboren.  The  wages,  or  the  prfost 


SK.d  mnvMM  nxAtwD  mas 


349 


paid  for  various  Idmb  oC  woik,  tend  to  keep  pace  with  each 
other.  Mil"  is  so  versatile  a  machine  that  one  kind  of 
workman  can  readily  substitute  for  another.  On  a  pinch, 
the  same  man  may  be  a  factory  employee,  a  farm  hand,  a 
coachman,  carpenter,  mason,  phiiid)er,  or  derk.  Conse- 
quently, these  various  sorts  of  work,  though  filling  very 
unlike  wants  on  the  demand  side,  compete  on  the  supply 
side,  and  tend  to  bear  similar  prices.  If  the  wages  of  deiks 
rise,  the  wages  of  carpenters  will  rise  also,  because  otherwise 
many  carpenters  would  want  to  become  clerks.   The  con- 
sequence is  that  wages  of  aU  sorts  usuaUy  rise  or  fall 
together.   K  labor  of  all  kinds  could  be  perfectly  sub- 
stituted, wages  of  an  Unds  would  remain  in  absolutdy  fixed 
ratios  to  each  other, ».«.,  would  rise  or  fall  together  in  exactly 
the  same  ratios.   Such  "  perfect  mobiUty  of  labor,"  however, 
never  exists.   On  the  contrary,  labor  may  be  classified 
into  several  more  or  less  "  ncmcompeting  groups,"  sudi  as 
bnun  work,  skilled  work,  and  vmskilled  work. 

Two  goods  complete  each  other  in  supply,  or  are  comple- 
mentary on  the  supply  side,  when  jointiy  they  involve 
the  same  cost,  ».«.,  when  the  supfdy  of  one  tends  to  carry 
with  it  the  supply  of  the  other.  The  less  important  of  the 
two  is  then  called  the  by-product  of  the  other.  Tallow 
is  a  by-product  of  beef  and  hides.  Other  examples  of 
artides  completing  eadi  other  in  supply  are  mutton  and 
wool;  coal,  coke,  and  gas. 

The  prices  of  two  completing  goods  on  the  supply  side 
tend  to  move  in  opposite  directions,  just  as  we  saw  was 
the  case  on  the  other  side  of  the  market  Consider,  for 
instance,  beef  and  hides.  If  the  price  of  beef  rises,  the 
amount  supplied  at  the  higher  price  will  increase.  Hwice 
the  supply  of  hides  will  be  increased  at  the  same  time.  Con- 
sequently their  price  iriQ  faJL 

We  see,  therefore,  that  two  artides  may  be  substitutes 
on  the  demand  side  by  replacing  each  other  in  satisfying 
the  same  sort  of  desires,  or  on  the  siq)ply  side  by  requinng 


3SO    ELEMENTAHY  WUNOPLES  OF  ECONOMICS  IC«».XVin 

the  same  sort  of  costs;  and  also  that  they  may  be  com- 
Pkmen^  on  the  demand  side  by  JointlT  S^Kc 
^  cteare,  or  on  the  supply  side  by  joinUy  requiSi'  thJ 

S  6.  PdcM  of  Ooodi  in  Scries 

In  all  the  cases  thus  far  considered,  the  relationahfe 
between  articles  is  on  the  same  side  of  the  iiarket 

volves  both  sides  of  the  market 

de^n^T^^    u**"*  "^'"^^  relationship  to  the 

demand  of  another.  This  is  true  of  two  articles,  one  of 
whi^^used  m  producing  the  other.   Such  gSds  may 

t?!;     1  *  manufacture.    In  this  respect 

the  r  relauonsh  p  differs  from  the  others  discu^.  C 

of  each  other  on  the  same  side  of  the  market,  whereas 
wool  and  woolen  doth,  for  instance,  "go  tand^  "  on 
opposite  s  des  of  the  market.  Wool  is  Ld  («  ^  rteri^? 
u^^u^g  woolen  cloth  Hence  the  prl^^^r^^faS 
u  ."^^.^tdy  rdated  to  each  other.  The 

c^ide^^'^'T',''  ^"^^  '"''^  ^^1-tions  hith^to 
considered.  Wool  and  woolen  doth  are  neither  substftut^ 
norcomplementary  goods  on  the  same  swf^rtSe^S^ 

tLTemani^^nr.?*'^^  Both 
^  demand  and  the  supply  side  are  involved.  CertaS 
P^e  denu^nd  wool  in  order  to  supply  woolen  cb;h.  ^ 
rue  pnces  of  goods  in  series  move  in  symoathv  Tf  }, 
evident,  for  instance,  that  given  a  high  priHor  W,i  ^'tl^e 

Srket  S  nf  ."'^^"T''  ^  »  consequence  the 
maAet  pnce  of  woolen  doth  wiU  rise.  Convereely,  given 
•  1^  price  for  woolen  doth,  the  prices  in  the  deS 


Sic  7]  MUTUALLY  KELAIED  PSICES  351 

■chcdwlg  (or  curve)  f<»r  wo(d  will  be  higher  than  otherwise, 

and  as  a  consequence  the  market  price  of  wool  will  rise. 
Thus,  any  change  in  price  of  either  of  these  two  articles 
will  tend,  sooner  or  later,  to  make  the  price  of  the  other  move 
in  the  same  directiim. 

In  the  same  way  cotton  and  cotton  cloth  are  goods 
in  series,  and  their  prices  are  likely  to  move  in  sympathy 
with  eadi  other ;  likewise  the  prices  of  wood  and  houses,  of 
wheat,  flour,  and  bread;  or  of  iron  mines,  iron  ore,  pig 
iron,  rolled  iron,  steel,  steel  rails,  and  railways.  This 
chainlike  or  serial  relationship  comprises  many  other  ele- 
ments than  raw  materials  and  finished  products.  Thus, 
steel  is  related  to  the  labor  and  coal  consumed  in  its  manu- 
facture in  much  the  same  way  as  it  is  to  the  iron  ore  out  of 
which  it  is  wrought.  The  price  of  steel  therefore  moves  in 
sympathy  not  only  with  the  price  of  iron,  but  with  that  of 
coal  and  labor  as  well  and  of  all  the  other  goods  employed 
in  its  production.  The  series  or  chain  of  goods  is  the  chain 
of  productive  processes  already  discussed  under  the  head 
of  succesave  interactions. 

I  7.  Bflorts  and  S«tiiii6lioBB  tlM  mttmatt  Itelon 

This  serial  relationship  enaUes  us  to  see  dearly  the  fact 
that,  at  bottom,  si^idy  rests  <m  tSotta,  and  demand  on 
satisfactions.  We  have  seen  in  economic  accoimting  that 
all  items  of  income  and  outgo  cancel  among  themselves, 
except  efforts  and  satisfactions.  We  now  see  this  same 
truth  in  its  application  to  wappLy  and  demand.  As  simple 
as  this  truth  is,  it  is  commonly  overlooked,  because  people 
are  blinded  by  the  all-pervading  presence  of  money  receipts 
and  expenses.  The  business  man,  reckoning  in  money, 
comes  to  think  oi  mtmey  e^qwnses  and  money  receipts  as 
though  they  were  real  costs  and  benefits  in  the  productive 
process,  whereas  they  are  only  the  representatives  of  real 
costs  (efforts)  and  real  benefits  (sat^actions).  We  ^mh 


3Sa    ELEMENTARY  PXINCIPLES  01  ECONOMICS  ICBAt.XVm 


tangle  ourselves  from  the  meshes  of  this  money  anaxe  when 
we  see  that  the  controlling  factors  in  determimng  prices  are 
satisfactioos  on  the  demand  side  and  efforts  on  the  supply 
nde.  Between  efforts  and  satisfactions  there  may  be  in- 
numerable intermediate  stages,  at  each  one  of  which  sumiy 
and  demand  result  in  a  market  price;  but  each  such  price 
represents  simply  anticipated  satisfactions  or  efforts  trans- 
lated into  money  valuations.   Any  dealer  at  intermediate 
stages,  between  efforts  preceding  him  and  satisfactiottB  fol- 
towing  after,  has  but  Uttle  independent  influence  on  pri.c. 
He  is  hke  a  link  in  a  chain  or  a  cogwheel  in  a  machine, 
merely  receiving  and  transmitting.  U  some  real  cost  of 
production  earUer  in  the  chain,        some  effort  (Ubor), 
18  saved,  he  receives  the  cheapening  effect  from  those  of 
whom  he  buys,  and  passes  it  on  to  those  to  whom  he  seUs. 
n  some  real  benefit  is  reduced,  i.e.,  some  satisfaction  di- 
minished, as  by  a  change  of  fashion,  he  receives  the  cheapen- 
ing effect  from  those  to  whom  he  sells,  and  passes  it  back 
to  those  from  whom  he  buys.   The  supply  and  demand  of 
wheat  m  the  Chicago  wheat  pit,  for  instance,  is  chiefly 
dependent  on  the  labor  of  growing  wheat  and  the  satisfaction 
of  eating  bread.   If  a  new  labor-saving  reaping  machine 
a  devised  which  reduces  the  actual  effort  of  producing 
wheat,  the  effect  is  soon  fdt  by  the  Chicago  wheat  dealer  and 
transmitted  to  his  customer.   Or  if  people  turn  to  a  rice 
diet  and  no  longer  care  much  for  bread,  this  effect  is  also 
soon  felt  by  the  Chicago  dealer  and  passed  back  to  the 
wheat  producer. 

An  intermediate  dealer  may  not  know  the  ultimate  cavaei 
of  thechangesinsupplyand  demand  which  affect  his  business 
on  either  side,  and  sometimes  he  does  not  try  to  think  beyond 
what  he  immediately  observes.  Wholesale  mexchants  gen- 
erally offer  to  their  customers,  the  retailers,  as  an  expiA- 
nation  of  the  rise  in  their  charges,  the  fact  that  they  have 
to  pay  higher  prices  to  the  jobber ;  or,  again,  they  may  offer 
to  the  jobber  as  an  explanation  of  the  fiuA  that  they  cannot 


Sk.  7l  MUTUALLY  BXLATBD  FtlCBS 


353 


pay  as  much  as  before,  the  fact  that  they  cannot  get  aa 

much  from  the  retailers.  Any  such  ejq>Ianation  of  prices  is 
shallow,  for  it  goes  no  farther  than  explaining  one  price 
by  another  in  the  next  link  in  the  chain  of  prices. 

We  see,  then,  that  everything  intermediate  wUdi  happens 
in  the  economic  machinery  represents  merely  steps  in  the 
connection !  stween  effort  and  satisfaction.  When  Robinson 
Crusoe  supplied  his  wants,  there  vas  a  direct  connection 
between  '  '2  nSocta  in  picking  berries,  for  instance,  and  the 
satisfaction  of  eating  them.  To-day  there  are  a  number  of 
links  between  these,  but  the  same  principle  still  applies. 
Supply  and  demand  at  intermediate  points  merely  reflect 
final  efforts  and  satisfactions. 


aa 


CHAPTER  XDC 


,  ..k> 


INTEIZST  AMD  MONXY 

S  I.  The  Importance  of  Interest 

>,  f  We  have  seen  that,  in  Jie^Iastanalysis^  prices  dependum 
^    compaijiMns  hftween  jatiaiactions.  or  efforts,  or  both.  But. 


V  '''oat  satisfactions  and  efforts  are  not  aJJL^mu^^ 

A  ^      /  distributed  m  time,  their  comparison  requires  uaJto 

qS  (  taJte  account  of  interest.  '  Consequently  our  study  of  prices 
^     I     will  not  be  complete  without  a  study  of  the  rate  of  interest. 
\  >     It  is  only  by  means  of  the  rate  of  interest,  pypliHtly  or 
implicitly  employed,  that  tliA  pylfi^      Ttr'*  „gpo^  are 
reckoned.   The  rate  of  interest,  as  previously  explained 
(Chapter  VI,  §  i),  is  itself  a_  sort  of  price.   So  far  as  it  has 
beoi  used  in  Chapter  VI  and  elsewhere  for  capitalizing 
income,  it  was  taken  rea^  made  just  as  all  prices  were 
v'V     taken  ready  made.   We  are  now  about  to  inquire  how  this 
-><>^     peculiarly  important  price,  called  the  rate  of  interest,  is 
-         actually  determined,  just  as  we  have  already  inquired  how 
"^..^X  ^.ptli**'  prices  are  determined.    And  it  is  by  far  the  most 
'  vp*^  important  sort  of  price  with  which  economics  has  to  deal. 
/  Most  people  have  an  idea  that  the  rate  of  interest  is  a 

tedmical  Waal  Street  phenomenon,  concerning  nobody  ex- 
cepi  money  lendm  or  borrowers.  This  is  pMtially_toiejrf 
explicit  or  contract  interest.  But  there  is  TmpUcit  interest 
to J«_conadwed.^^  rate  of  interest  is  the  rate 

mtertnt  explicitly  stated  in  a  contrart,  ._An  implicit  rate 
of  interest  is  the  rate  of  interest  iriod^  an^Svesitor  expects 
to  realize  who  makes  sacrifices  at  one  time  for  the  sake^itf 
con^nsatiMj^Bi^g  ^  a  later  time.  Implicit  interest 
is  alio  calMpr(^y  As  was  shown  in  Chapter  VI,  if  we  vr 


*  , 


il 


nmutr  amd  momxy 


-si    F 1 

355 


invest  in  a  bond,  the  price  that  we  pay  carries  with  it  ^ 

implicatkm  of  a  rate  of  interest  we  expect  to  realize  on 
the  investment.    The  implicit  rate  of  interest,  or  the  rate 
which  we  realize,  is  that  rate  of  interest  which,  when  used 
for  discountii^  the  incraie  <rf  the  bcmd,  will  give  the  price 
at  which  we  bot^t  the  bond.    For  instance,  if  a  bond 
yielding  $$  a  year  for  lo  years,  and  then  redeemable  for 
$ioo,  sells  now  for  $102,  we  know  that  the  rate  of  interest 
realized  is  not  five  per  cent,  as  it  would  be  ?4  it  sold  at  par. 
It  is  less  than  five  per  cent  —  about  4.8  per  cent  (see 
Chapter  VI,    4  .   The  implicit  rate  of  interest  we  realize . 
on  such  a  bond  may  be  found,  as  we  have  abeady  seen, 
from  a  mathonatical  table.  The  man  who  auys  the  bond 
mentioned  receives  4.8  per  cent  interest  on  hb  investment 
just  as  truly  as  though  he  had  lent  out  his  $102  i  hat 
rate.    In  fact,  to  buy  a  bond  of  a  corporatiwi.  or  a 
government  is  often  i^oken  of  as  "  lending  raatopj "  to 
that  corporaticHi  or  govemmoit   Again  the  buyer  of 
land  who  pays  "tv  snty  years'  purchase"  (for  instance, 
$20,000  for  land  from  which  he  expects  an  annual 
rental  of  liooo)  is  making  five  per  c«it  just  as  thoai^ 
he  were  lending  out  his  C2c,ooo  at  that  rate.    In  the 
same  way  a  man  who  buys  stock  realizes  a  certain  rate  per 
cent  on  his  investment  just  as  if  he  were  lending  money 
at  interest.    Similariy  the  purchaser  of  a  house  gets  a 
return  on  the  money  he  spent  for  it  quite  analogous  to 
the  return  he  would  have  recdved  had  he  knt  that 
money. 

In  short^-CMgyJnYntmf"*  «  QwingfMw  tn  ■  Intn  and 
faivolves  a  rate  ofJnigifiaL  on  the  P'JChasejaiCfi  j'ust  as^ 
truTy'lfslioes  the..baB.  As  every jim^asejs^real^^ 
hxvestmmTbf  present  moneyTof  ore  benefits  in  ^^y 
or  m^suwlje  in^mnnffv.  flvoy  iwTchase  jricc  jkbjJLm  L 
jeEfSr^SaPUt.  A  man  cannot  even  buy  a  piano  or  an- 
overcoat  or  a  hat  without  virtually  discounting  the  value  of 
the  uses  which  he  expects  to  make  of  that  particDlar  article. 


356      ELElfXNIARY  PSINCIPLX8  Off  IOON(»aCS    (Clur.  XDC 


^  Il^e  rate  qf  intereat,  then,  ia  nnt  TOnfli^fjH  Stl^, 
but  is  something  that  touches  .thtilaUyJiffijjLuaLAU. 

How,  then,  is  this  important  magnitude,  the  rate  of 
interest,  determined?  The  problem  of  interest  is  one  of 
the  most  perplexing  problems  with  which  economic  idence 
has  had  to  deal,  and  for  two  thousaod  yean  people  have 
been  trying  to  solve  the  riddle. 

S  a.  A  CmmBon  Monajr  Falla^ 

r') 

.  '  r    Among  the  earliest  explanations  of  the  rate  of  interest 
V'\  ^  ywas  that  it  is  a  pajrmcnt  simply  for  money,  and  that  con- 
X-'^^e^sequently  it  dq)aids  iqx>n  the  quantity  of  money  on  the 
/market.   We  commonly  speak  of  interest  as  the  "price  of 
yj^4)money,''  and  the  trade  journals  tell  us  that  " money  is 
f*^"  ^       Street,  meaning  that  interest  is  low,  or  that 
;  i  y  it  is  easy  to  borrow  money.   Or  we  are  told  that  "  the 
^  '"^^  money  market  is  tight,"  meaning  that  it  is  hard  to  borrow 
<^       money.    We  often  hear  the  argument  that  the  present 
high  cost  of  living  cannot  he  due  to  any  ploitif ulness  of 
money,  because,  if  money  were  really  plentiful,  it  would 
be  cheap,  meaning  that  the  rate  of  interest  would  be  low. 
Probably  the  great  majority  of  unthinking  business-^aen 
^eBxve  that  intaest-iaUow-jRhea-money  is  plentiful,  and 
high  when  money,  ja^scarce.  --^n 

This  view,  however,  is  fallacious,  and  the  fallacy  <x)nsists 
^  forgettin<|[  that  plentiful  mnn^y  nitj^^^ff^  jr^^c^^ 
demand  foaT  loaais  just  as  much  as  it  rsdwm  t^f  supply, 

an3^fl5erefore  hiaS  just        mnrli  fpnAmnry  tn  r^j^^  tnfpyAe| 

*°  ^^^^^^       Suppose,  for  instance,  a  piano  dealer  wishes 
,  to  stock  up  Tiis  store  with  pianos  (the  price  of  pianos  being 
Maoo  i^jiece),  and  that  he  wishes  to  have  a  stock  of  s© 
/  pianos  in  his  salesroom.   To  accomj^^  this  he  evidently 
/    will  have  to  borrow  $10,000.   He  goes  to  the  bank  and 
j  borrows  it.   Now,  let  us  suppose  that  money  becomes  twice 
/  as  abundant  This  man,  wanting  to  borrow  again,  will  have 


357  rou) 


DiinXST  AND  MOHK, 


ta  idea  thftt  in  some  way  he  wffl  this  thne  get  a  lower  rate 
of  interest  at  the  bank,  because,  he  reasons,  the  bank  will 
have  more  money  in  its  vaults  and  wiU  be  more  anxiojia  T  ^^owey 
to  lend  it  oat  What  he  forgcte  b  that  the  rewlt  ol  the  supfV 
very  abundance  of  money  will  be  that  prices  in  general  j^j,^^*^*^ 
will  rise,  and  presumably  the  price  of  pianos  in  particular  ^ 
/will  rise ;  therefore,  b  order  to  get  50  pianos,  he  wiU  h^ 
to  borrow  twice  as  much  money  to  enable  hhn  to  pay  for 
his  pianos  at  the  doubled  prices.   In  order  to  buy  50  pianos, 
\  he  will  need  $20,000  instead  of  $10,000.  Likewise  every 
^  other  borrowing  tradesman  will  need  to  borrow  twice  aa 
much  to  conduct  the  same  buidness.  The  fact  that  the 
banker  has  twiceasjaurh  to  lend  is  therpfnrp  rnmpletely 
o&et  by  theJactJhat.^^^QgQgg^^^^'^"^  ^"  borrow 
twice""as  muc^     T^g  conaequen*:?  «  that,  in^the^md 
doubling  ti^_asaoMnLjof  mnnpy  will  not  " 
fetetCTtr^It^Trifiqily  aiact  * 
and  borrowedt^ 
/'"'"Wemust  remember  that  interest  is  not  only  the  price 
\of  money,  but  it  is  the  price  mi  money.  Inteccet  is  unlike 
>)any  other  price  in  that  it  is  the  price  of  money,  but  it 
^  is  like  all  other  prices  in  that  it  is  the  price  in  money. 
Thus  the  rate  of  interest  is  found  by  dividing,  say,  Uie 
$5  paid  per  year  by  the  $xoo  cash  for  which  it  is  paid. 
Both  the  numerator  and  the  denominator  of  this  fraction 
are  expressed  in  terms  of  money.   If  we  pay  attention  only 
to  the  denominator,  we  are  apt  to  think  that  an  increased 
supply  of  money  should  decrease  the  rate  of  interest.  But 
if  we  ate  to  have  a  one-sided  view,  we  might  just  as  well  fix 
our  attention  only  on  the  numerator,  and  maintain  that  an 
increased  quantity  of  money,  instead  of  decreasing  the  rate 
of  interest,  ought  to  uwrease  it.  The  truth  is,  inflation  of 
money  ultunately  works  equally  on  both  sides.  In  mechan- 
ics one  of  the  first  things  we  learn  is  that  a  man  cannot 
raise  himself  by  pulling  up  on  his  boot  straps.    The  reason 
isthatheispullmgh&nsdf  downasmuchasi)^  Thei^ 


3$8     BUMBNTA&y  PUMCaPUI  Of  lOOMOIIICi  fCMV.XIX 


lUHnn  i}f  fhtf  «ainmy  r""*  ****^t  up  nn  thn  li^tnl  Hilt 

as  hard  a*  it  pnllff  l»  H^fn     ^hfj  supply  side. 

WTSiould  beware  of  the  phrase  "  the  price  of  money 
tot  it  has  two  meanings^  It  may  mean  ^hc  rate  of  intmdi 
iHiidi  is  a  ratio  ot  exchange  between  tm^ 
price  of  money-capital  in  terms  of  money-income;  or  it 
may  mean  the  purchasing  pow$>oi  money  over  other  goods 
—  the  amount  of  other  gqpds  fgj  whidl  a  given  ftmougt 
money  can  "Be'exdumged.  The  ibluuiAnfli jkjQumeyj^Sr") 
as  we  have  seen,  reduce  its  price  in.  the  sense  of  puEChitifig 
power  over  goods,  but  it  need  not  on  that  account  reduce  j 
its  price  in  the  sense  of  Uw-iatejaLinterest  Yet  the  idea 
that  the  plentifulness  (tf  m<mey  tends  to  make  inteiwt 
low  is  a  persistent  one  among  business  men. 

One  reason  for  this  idea  is  that  bankers  usually  look  upon 
mraqr  in  relation  to  their  reserves,  and  if  bank  reserves 
are  km,  they  have  to  raise  the  rate  of  inter«»t  to  "  protect " 
those  reserves.   If  the  reserves  are  abundant,  bankers 
reduce  the  rate  of  interest  in  order  to  get  rid  of  the  reserves. 
The  banker  is  constantly  watching  his  reserve,  and  has  to 
adjust  the  rate  of  interest  with  respect  thereto.  One 
way  to  get  rid  of  a  plethora  of  money  in  the  reserve  is  to 
lower  the  rate  of  interest,  and  one  way  to  protect  a  de- 
pleted reserve  is  to  raise  the  rate  of  interest.   But  the  banker 
should  not  measine  the  amount  of  money  circulating 
outside  by  the  amount  cf  money  inside  the  bank  vaults. 
What  he  forgets  is  that  a  larger  reserve  in  his  vaults  does 
not  necessarily  mean  more  plentiful  money  in  the  country ; 
nor  when  we  have,  as  at  present,  for  instance,  a  great 
quantity  of  money  throughout  the  world,  does  this  fact 
necessarily  imply  that  Banker  Smith  will  have  more  gold 
in  his  vaults.    The  money  may  get  into  the  pockets  of 
people  first ;  it  may  in  that  way  raise  prices  so  high  that 
the  borrowers  at  banks  may  demand,  for  the  reasons  ex- 
plained, larger  loans.   And  yet,  if  for  some  reason  a  due 
share  of  the  money  has  not  at  the  start  flowed  into  the 


mtMMMt  AMD  mom 


3S9 


banks,  the  result  will  be  that  Banker  Smith  will,  for  a  time, 
have  too  little  reserve  in  relation  to  the  greater  loans  that 
are  now  demanded  of  him.  The  oonsequeiKe,  then,  witt 

be  actually  to  raise  the  rate  of  interest  When,  therefore, 
the  banker  says  that  more  money  lowers  the  bank  rate 
of  interest,  he  ou|^t  to  say,  "  When  bank  reserves  get  an 
undue  fraction  of  mc»ey,  the  bank  rate  of  interest  wQI 
be  low ;  but  when  an  undue  fraction  goes  into  circulation 
outside  of  banks,  the  rate  will  be  high."  In  other  words, 
an  increase  of  money  will  operate  in  two  different  ways, 
accordhig  to  where  it  hai^)ens  to  go  first  N<»maUy  and 
eventually,  as  we  have  seen  in  a  previous  chapter,  an  in- 
crease of  money  distributes  itself  between  pockets,  tills, 
and  bank  reserves,  so  as  not  to  disturb  the  normal  ratios 
between  them.  When  this  happens,  the  rate  of  kiterest 
will  not  be  affected  at  all. 

This  conclusion  is  not  b^sed  merely  nn  Jh^i^^  Aa^a 

matter  of  statistical  fact,  the  rate  of  interest  does  not  go 
up  when  nuaiqr  Is  scarce  and  down  when  money  is  abundant 
For  instance,  an  examination  of  the  figures  for  per  capita 
drculation  of  money  in  the  United  States  for  thirty-<ive 
yean  shows  that  in  about  half  of  the  cases,  when  money  grows 
more  abundant,  interest  is  highsr,  and  in  half  of  the  e 
it  is  lower.  In  other  words,  interest  changes  with  i 
lutely  no  rehttion  to  the  t)ttanti^ot  money  m  drci^  . 


f  3.  BflM  during  Appreeiatkm  or  Deprodatloa 

We  conclude,  then,  that  an  inflation  of  the  currency  does 
not  affect  the  rate  of  interest,  provided,  however,  the  inflation  1 
affects  the  loan  at  the  Hme  the  loan  is  made  just  as  mnek  as  V 
it  affects  the  repayment  at  the  time  the  repayment  is  made._)  '''"^^ 
But  the  loan  and  the  repayment  do  not  occur  at  the  same 
time;  there  is  an  interval  of  time  between  them,  and  it 
may  be  that  the  degree  of  inflatioa  is  greater  or  kn  at 
the  end  than  at  the  b«gbuiing  of  this  period,  fa  which 


3fio     MUMEKtAn  nniCDUt  09  BOOIIOinci  ICkAftZIX 


cue  the  change  In  the  inflation  may,  through  iu  effect 
on  the  values  borrowed  and  repaid,  affect  the  rate  ot  interest 
iming  the  process  of  change.  While  inflation  is  taking  plact 
there  is  an  effect  on  the  rate  of  interest,  because  the  effect 
of  faiflation  on  the  sum  loaned  b  different  from  the  effect 
on  the  sum  repaid. 

This  brings  us  back  to  the  consideration  of  the  trar.sition 
periods  of  rising  and  falling  prices  and  discloses  a  phenome- 
non which  we  were  uuc  ready  to  discuss  in  Chapter  X.  lys 
^  phenomenon  is  that  the  rate  of  interest  tends  to  be  high 
during  a  transition  period  when  prices  are  rising  from  one 
^        level  to  a  higher  level  and,  reversely,  that  it  tends  to  baJow 
\  prices  are  falUng  from  one  level  to  another.  Suppose, 

\  ,^         instance,  that  prices  are  rising  at  the  rate  of  one  per  cent 
ccff^"^^  P**"  f^^-   Theu  $ioo  lent  to-day  is  equivalent  in  pur- 
chasing power,  not  to  lioo  repayable  next  year,  but  to  |iox 
repayable  next  year.  If  prices  had  not  risen,  the  borrower, 
whoi  he  paid  back  his  pHndpal  of  |zoo,  would  be 
paying  back  the  same  amount  of  goods  as  were  repre- 
sented by  the  $ioo  when  he  borrowed  it.    In  terms  of 
goods  he  woukl  have  been  in  the. same  position  at  the 
end  as  at  the  beginning,  and  so  would  the  lender.  Bntw* 
are  suppling  Uiatprices  are  rising.  Then  the  lender,  when 
he  gets  back  his  pnndpal  of  lioo>.doe8  not  get  back  as 
much  purchasing  power  as  he4eBt,  4Uid  ^^rrmrM. 
^        not  pay  back  as  muoi  purchasing  pnrrr  ng  he  bniiowed, 
^  jV.-     In  other  words,  the  fact  that  prices  have  risen  during  the  year 
J\     has  made  things  easier  for  the  borrower  and  harder  for  the 
>  ^,  lender.  During  the  Civil  War  the  United  States  govem- 
^,  ^    ment  issued  a  great  many  "  greenbacks."  The  result  was  \ 
^\       an  uiflation  of  the  currency  and  a  consequent  rise  of  prices, 
r  and  the  result  of  that  was  tb&t  men  who  had  mortgaged 
'jfL    \thdr  farms  in  the  West  found  it  very  easy  to  pay  back 
.^,.v     jhdr  loans.    As  they  said,  the  mortgages  on  their  Uana 
r^-.   »  * disappeared  like  smoke."    Five  thousand  doUars  paid 
,  »  i^i864  for  $5000  loaned  in  i860  reaUy  represented  only 

v7 


XMnmr  hkd  mokby 


361 


kali  M  much  puichaiing  power  over  goods,  for  pricct  had 
doubled ;  the  inflatkm  of  the  cumacy  froad  the  buwweia 
from  half  their  debts. 

Wc  see,  then,  that  v.  hen  prices  are  rising,_the jrindpal 
of  a'^SgETbecomes  ^m  u^  ku  valuable.  If  prices  are  rising 
doe  per  cent  per  annum,  that  is,  if  the  principal  of  the 
debt,  in  terms  of  guods,  is  falling  about  one  per  cent,  then 
the  interest  on  the  debt  ought  to  be  increased  about  one 
per  cent  in  order  that  there  should  be  the  same  burden 
on  the  borrower  as  there  would  have  been  if  prices  had 
not  risen.  If  prices  are  rising  two  j.  'ut  per  annum, 
two  per  cent  would  have  to  be  a^* '  '  the  ratfe  ol  Jn- 
^terest  inT  order  to  compensate  for  rise  j  and.  so  on  fctt 
ofliernites of  riseln  prices.  On  tL  jther  hand,  if  prices 
are  falling,  we  must  reduce  thelrajift  of  Interest  to  <^ict 
the  appreciation  of  the  jNcindpaL 

Hm  ideal  compensation  in  the  rate  <A  interest  would  oc- 
cur if  man's  foredgjit  were  perfect.   If  we  knew  absolutely, 
for  instanc.  that  next  year's  prices  were  going  to  be  two 
per  cent  higher  than  this  year's,  the  rate  of  interest  ndi^t 
be  two  per  c^nt  grater  than  otherwise.  So  abo,  if  we 
y  *ew  absolutely  that  all  prices  would  be  one  per  cent  less  a 
>ear  from  to-day,  than  to-day,  the  rate  of  interest  during  the 
year  might  be,  on  that  account,  one  per  centjess  thanottori ^ 
wise.  As amatter  of  fact,  an4i;pproximatioirysuch  adrn  f.  ( . 
justment  does  actually  occur.    A  study-oT'uie  periods  of  ^^^^^i^r. 
rising  ImTTaffing  p^^         the  United  States,  Enj^d,  V 
Germany,  France,  China,  Jap(i  .  and  India  shows  that,  in^ 
genml,  when  pikes  are  rising,  the  rate  of  interest  is  high,K 
and  when  prices  are  falling,  it  is  low.   But  the  adjust--^  . , 
ment  is  never  perfect.  Men  never  know  the  future  exactly ;  '^'^ 
they  can  only  guess.   People  arp  apparently  rehictant  to  ^^fr^  '. 


bdieve  that  prkes  are  going  t  r 

direction.   The  result  of  th  .  ir^ide 


•••ry  much  in  either 
•>/  foresight  is 


that,  when  prices  are  rising,  t  rate  ol  inter  ^t  is  usually  ^  . 
high,  but  not  so  hi^  as  . it  s'  a; :  >e-ta  mj.'\A  a_pcrfertj;iv' 


r  r 


/5 


362      ELEMENTARY  PRINCIPLES  OP  ECONOMICS    IChap.  XK 


compensation  for  the  rise  ;  and  that,  on  the  other  hand, 
when  prices  are  falling,  the  rate  of  interest  is  usually  low, 
but  not  so  low  as  it  should  be  to  make  a  perfect  compensa- 
tion for  the  fall.  Thus  the  rate_of  interest,  though  par- 
tiaUy  adjusted  during  transitioJljjfiriodSj  js.jiot  si^dexitly 
adjusted  to  alter  the  essential  fact  emphasized  in  Chapter 
X;  namely,  that  during  rising  prices  the  burden  of  debts 
grows  lighter  on  borrowers,  and  that,  consequently,  "enter- 
priser borrowers"  tend  to  be  prosperous j^while,jeversely, 
when  prices  are  falling,  the  same  people  Jcee,  and  "  business 
is  dull  .  "  ^  "  ~       "  " 

§  4.  Effect  ol  Unequal  Foresiclit 

Besides  bemg.  .inadequate,  foresight-  is  unequally_dia- 
tributoL    piffermt,  eMSQns_M»  in  tihieir  ^wer 

to  foresee;  and,  in  general,  borrowers  fores**  better  thajj 
lenders.  The  great  borrowers  of  to-day  are  not,  as  is  often 
supposed,^  the  ignorant  poor,  but  the  alert  and  well-informed 
rich.  It  is  the  function  of  these  people  to  look  ahead,  and 
the  consequence  is  that  they  foresee  a  rise  or  fall  of  prices 
more  quickly  thi.n  the  lenders  or  bondholders,  who  are  only 
sflent  partners  in  business.  Now,  a  consequence  of  the 
superiority"  in  foresight  of  borrowers  over  lenders  is  that 
the  borrowers  are  willing,  during  rising  prices,  to  pay  a 
higher  rate  than  they  have  to  pay,  whereas  the  lenders  do 
not  see  any  reason  for  raismg  the  rate  of  interest.  Sup- 
pose that  the  rate  of  interest,  on  a  basis  of  stationary 
prices,  is  five  per  cent,  and  that  prices  are  rising  two  per 
cent  per  annum.  We  know  that  the  rate  of  interest  ought 
to  be  sevoi  per  cent  m  order  to  make  things  even ;  but 
let  us  suppose  that  the  borrowers  foresee  that  prices  are 
going  to  rise  two  per  cent  per  annum,  and  that  they  are  per- 
fectly willing  to  pay  seven  per  cent,  where  otherwise  they 
would  pay  five  per  cent.  Let  us  suppose,  also,  that  the 
lenders  are  not  alert  enough  to  see  why  interest  should  be 


S«c.4l 


INTEREST  AND  MONEY 


363 


any  more  than  five  per  cent.   The  consequence  will  be  that 

the  rate  of  interest  will  not  rise  as  high  as  seven  per  cent,  but 
will  be  soinethingllEedx  per  cent.  The  consequence  of  this, 
in  turn,  is  that  the  borrowers,  who  are  willing  to  pay  seven 
pa:  coit  to  get  the  same  loans  that  they  used  to  get  at  five 
per  cent,  when  they  find  that  they  do  not  have  to  pay  seven 
per  cent,  but  can  get  loans  at  six  per  cent,  wiUJncrease 
the  size  of  their  loang.  Thus  borrowers  are  gnrftiiragp^ 
to_borrow  more.   Likewu«J^id4^  are  aro  to  Irad 

more,  for  theyind  that  they  can  get  six  per  cent  when  they 
are  willing  to  take  five  per  cent.    This  ax  per  cenTis  low 
in  the  eyes  of  the  boixowir&Jl&uOigh  in  the  fV^oi  tlhe 
deluded  lenders.   Thej»nsequence,  therefore,  is  an~lnga- 
tion  oFToans'sUrnuIated  from  both  sides  oftlTe  markeT 
\  ^       In  a  previous  chapter  we  saw  that  an  Increase  oTloans  of 
^        banks  produces  an  increase  of  deposits,  inflates  the  currency, 
^d  makes  prices  rise  further,  and  so  on  around  the  circle  of 
'  inflation,  loans,  deposits,  and  inflation  again.   The  circular 
^      I  process  has  to  come  to  a  stop  sometime,  but  it  never  does 
^   ,  L.  <pme  to  a  stop  until  the  rate  of  interest  is  adjusted.  .As  ^ong 
/4s  the  ratejl  interest  still  stays  too  tow.  botiOwiM  will 
V.  f/  \  continue  toQ  high.   When  presently  people  wake  up  to  the 
'  S  dagger  of  this  condition  of  inflated  loans  and  deposits,  the 
,  i| .  rate  of  interest  does  go  up,  discouraging  loans  and  predpitat- 
f   ing  a  arias.  Then  we  have  the  back-flow :  prices  decreas- 
ing, interest  falling,  and  discouragement  of  business.  This 
'^■^      has  all  been  explained  in  a  previous  chapter.   What  needs 
'"■'^     emphasis  here  is  that  an  essential  factor  in  all  these 
duinges  is  the  rate  of  interest.  The  rate  <rf  interest  is 


.1  TO 


"\  i  the  key  to  the  situation.   Were  the  rate  of  interest  properly 
'■^■"^  *  adjusted,  there  would  be  less  trouble,  if,  indeed,  there  were 
any  at  all.   Crises  would  be  fewer,  and  they  would  be  less 
sevoe. 

How,  then,  cairwe^get  a  better  adjustment  of  the  rateof^ 
interest?    One  way  is  to  prevent  these  chaages^-price 
Tj^jOs  nmch:  as  possible,.  This  we  have  already  discussed. 


364     ELEMENTARY  PSINCIPLES  01  ECONOMICS  [Cbap.XIX 

/  Another  is  to  have  men  more  alive  to  the  future  and  more 

^^^"5^  to  predict  what  is  going  to  happen  to  prices.  Edu- 
cation on  this  line  will  go  on  and  is  going  on  through  the 
trade  journals.  Still  another  way  is  throu^  the  removal 
of  the  existing  prejudce  agdmtjais^^ 
We  still  inherit  the  old  idea  that  interest  is  "usury"  or 
robbery.  If  we  could  once  get  rid  of  the  prejudice  against 
allowing  the  rate  of  interest  to  rise  hig^  as  well  as  to  fall 
low,  that  is,  could  regard  the  rate  of  mtercst  as  prq)aly 
subject  to  fluctuation  and  as  being  a  market  price  changing 
day  by  day,  like  any  other  price,  a  long  step  would  be  taken 
toward  preventing  crises. 


CHAPTER  XX 


mPAIIBMCB  fCOt  IMCOMB  IHB  BASIS  OT  INTXSKST 

S  I.  TIm  BrodiicUflty  Theoiy 

In  the  preceding  chapter  we  have  considered  the  relatbn 
of  money  to  the  rate  of  interest.  We  saw  that  the  money 
supply  has  no  effect  on  the  rate  of  interest,  except  during 
transition  periods.  The  real  riddle  of  interest,  therefore,  still 
remains  unsolved.  Why  is  there  such  a  thing  as  a  rate  of 
interest,  even  n^ien  the  purchasing  power  of  money  b  am- 
stant,  and  what,  then,  determines  that  rate?  What  otiber 
factors  besides  changes  in  the  purchasing  power  of  money 
affect  the  rate  of  interest  ?  We  must  now  go  back  of  money 
and  study  the  supply  and  demand  of  loans. 

Li  our  stud^  of  prices  we  began  by  considering  first  the 
part  played  by  money,  and  then  undertook  an  analysis  of 
supply  and  demand  of  goods.  We  are  following  the  same 
order  in  'mr  sttriy  ci  that  pecuHar  price  called  the  rate  of 
interait.  We  have  thus  £sr  considered  only  the  part  played 
by  money,  and  now  are  ready  to  imdertake  an  analysis  of 
the  supply  and  demand  of  loans.  We  shall  find  that,  con- 
trasted with  the  sui^ly  and  demand  of  goods,  which  resolves 
itself  in  the  last  analysis  into  a  comparison  between  dif- 
ferent marginal  desirabilities  and  imdesirabilities,  which  are 
smuUaneous,  the  STypljr^dJgaand  oHoans  r«olves  itself 
Inthelast  anaTysis^toao^^ttiriBon  betwem  <fflfaent  mar- 
^MraeidrabilitieS"an?  undwirabilitiesTw^A  are  not  xhmd 
Jl^tjmt  are  diittgmted^  at  diffietiai  pfets  itt  thai: 

36  s  '  


366       ELEMENTASY  PSINCIPLK  OT  ECONOMICS   (Cltf.  X3C 


Before,  however,  we  can  fully  justify  these  propositions, 
we  shall  need  to  clear  the  way  by  removing  some  of  the  many 
fallacies  and  pitfalls  which  surround  the  subject. 

There  is,  perhaps,  no  other  "nut"  so  hard  to  "crack  "in 
all  ecraiomics  as  this  one  of  the  rate  of  interest ;  and  before 
most  persons  have  grown  old  enough  to  consider  the  Mibject 
philosophicaUy,  they  h  ive  absorbed,  more  or  less  uncon- 
sciously, a  number  of  untenable  and  even  conflicting  theories. 

Next  to  the  money  fallarips  which  were  considered  in  the 
last  chapter,  one  of  Jhe  most  persistent  failac^>  that 
the  rate  of  interest  represents  the  "rate  of  proEuctiidty  of 
ai^tal/^  If  a  man  wh<5-has  never  thought  on  the  subject 
18  asked  why  the  ra  t  c  of  interest  is  five  per  cent,  he  wiD 
ahnost  invariably  answer,  "  because  capital  produces  five 
per  cent."    A  |ioo,ooo  mill  will  produce  a  net  income  of 
$Sooo  a  year;  a  $100,000  piece  of  land  will  produce  a 
net  crop  worth  $5000  a  year;  and  so  on.   When  the 
rate  of  mterest  is  five  per  cent,  nothing  at  first  sight  seems 
more  obvious  than  that  it  is  five  per  cent  because  capital 
yields  five  per  cent.   Since  capital  is  productive,  it  seems 
self-evident  that  an  investment  of  $100,000  in  productive 
land,  machinery,  or  any  other  form  of  capital  will  yieW  a  rate 
of  interest  proportionate  to  its  productivity.   This  proposi- 
tion looks  attractive,  but  it  is  superficial.   Why  is  the  land 
VH>rth  $100,000?  Simply  because  $100,000  is  the  discounted 
value  of  the  expected  $5000  a  year.   We  have  seen  in  pre- 
vious chapters  that  the  value  of  capital  is  derived  from  the 
^ue  of  its  income,  not  the  value  of  the  income  from  that  of 
r  the  capital.  Capital  value  is  merely  the  present  or  dis- 
A  /  counted  value  of  income.    But  whenever  we  discount 
,^5w    mcome,  we  have  to  assume  a  rate  of  interest.   If  we  have 
wealth  yielding  a  given  perpetual  income  of  $5000  a  year 
[    and  capitalize  this  income  at  five  per  cent,  we  get  $100,000  as 
\     the  value  of  the  wealth.    It  would  be  reasoning  in  a  circle 
\    to  derive  the  rate  of  interest  (five  per  -ent)  by  dividing 
V  the  $5000  by  the  $100,000;  for  this  $100,000  was  itself 


0^  I  «- 


Sici] 


THE  BASIS  OF 


•  *  ( r  ,  - 
IMPREST 


36' 


derived  by  assuming  the  rate  to  be  five  per  cent  in  the 
first  place.  Again,  if  we  have  wealth  yielding  $1000  for 
50  years,  and  capitalize  it  at  five  per  cent,  we  find  its 
present  value  to  be  $18,300.  One  year  later,  by  the  same 
process,  its  value  will  be  $18,215,  showing  a  depreciation 
of  $85.  If  we  subtract  this  depreciation  from  the  $1000 
of  income,  we  obtain  $915  as  the  interest  accrued,  which 
is  exactly  five  per  cent  of  the  $18,300,  but  this  r«ult,  five 
per  cent,  is  a  necessary  consequence  of  the  assunq>ti(m 
of  five  per  cent  when  we  calculated  the  present  value  as 
$18,300  and  $18,215.  Had  we  assumed  four  per  cent  for 
this  calculation,  we  would  have  gotten  fom  per  cent  of 
accrued  interest  as  a  result.  We  always  find  at  the  end 
exactly  what  we  assumed  at  the  beginning ;  but  if  we  are 
not  careful,  we  delude  ourselves  into  thinking  that  we  are 
finding  something  new. 

It  is  evident  that  if  an  orchard  of  ten  acres  yields  xoo 
barrels  of  apples  a  year,  the  physical-productivity,  10 
barrels  per  acre,  does  not  of  itself  give  any  dew  to  what 
rate  of  return  on  its  vahe  the  orchard  yields.  Even  as- 
suming a  given  value  for  the  100  barrels  of  apples  as,  say, 
$200,  we  are  still  imable  to  state  what  the  rate  of  interest 
is.  We  can  only  say  that  the  orchard  yields  $2  per  acre. 
We  cannot  say  it  yields  so  mudi  per  cent.  What  then  is 
the  rate  of  intoreirt  yielded  by  the  orchard  ?  This  ques- 
tion cannot  be  answered  without  a  knowledge  of  the  valtte 
of  the  orchard ;  and  the  value  of  the  orchard  cannot  be 
obtained  without  assuming  a  rate  of  interest  and  using  it 
in  discounting  the  income  which  the  orchard  yields.  The 
orchard  produces  the  apples,  but  the  value  of  the  orchard 
does  not  produce  the  value  of  the  apples ;  on  the  contrary, 
the  vahw  oi  the  apples  produces  the  vahie  of  the  orduud. 

The  following  diagram  shows  the  typical  relation  between 
capital  and  the  productivity  of  capital  in  the  physical  sense 
and  also  in  the  value  sense  —  which  latter  sense  is  the 
important  fKtor  &i  studying  the  imte  ol  i^mt. 


- 1. 


368       ELEMENTASY  PKINCIPLES  OF  ECOMOlilCS    (Cim#.  XX 


PinBTT  Capital  Fdtdib  boOMB 

lutrunieiits  ■   >  Benefits 

VeiBeoHnHriiiiMiiUe  Value  of  beaefiti 

This  scheme  signifies  (i)  Any  physical  instrument,  such, 
for  instance,  as  land,  railways,  factories,  dwellings,  or  food,  is 
the  means  for  obtaining  benefits  in  the  future ;  this  first 
8tq)  m  the  sequence  pertains  to  the  study  of  the  "  tech- 
nique "  of  production,  and  involves  no  rate  of  interest. 
(2)  The  benefits  are  valued  in  money;  this  step  pertains 
to  the  study  of  prices.  (3)  From  the  value  of  the  benefits 
thus  obtained  is  computed  the  value  of  the  original  instru- 
ment by  the  process  of  discotmHng;  it  is  dearly  with  this 
last  process  that  we  are  concaii«l  in  the  study  of 
interest. 

..  v^*^'     The  paradox  that^  when      rnm^  tn  th>.  valu^ni  rapifal  it  \^ 
,^  ,        value  of  income  whirh  prnHnrpc  tT,»  ^r-.i»^     ^np^f^)  nnt 
-/'"^       the  reverse,  is,  then^thejtumbling-Mock  of  the  productivity 
V.  V  ^  clear,  of  course,  in  any  particular  investment, 

' '  \      ffiit  ^selling  value  of  the  stock  or  bond  is  dependent  on 
***  expected  income.  And  yet  business  men,  althouf^  con- 
stantly employing  this  discount  process  in  specific  cases,  usu- 
ally cherish  the  illusion  that  they  do  so  because  their  capital- 
;J  /  ^     vahie,  if  invested  in  some  vague  "  other  use, "  would  actually 
■'  fi ,  .T>      produce  interest.    They  fail  to  observe  that  the  prinajde  of 
'\ ^  /       discounting  the  fut       universal,  and  applies  to  any  invest- 
■'■  ment  wha^^'^ver,  a  2  -  utat  in  such  a  discount-process  there 

J . .        is  neces&  -ily  assun  .  '  h  e  very  rate  of  interest  we  are  seek- 
i  \  '  ,i    ing  to  explain.   It    utile  to  derive  the  rate  of  interest  from 
"    '       the  productivity  of  capital. 

\         The  futility  of  this  productivity  theory  may  be  further 
,.  V  .  illustrated  by  observing  the  effect  of  a  change  of  productivity. 
^       If  productivity  makes  interest,  then  a  change  in  produc- 
,     ;^     tivity  ought  to  make  a  corresponding  change  in  the  rate 
i  v'i       ^"^rest.    Yet,  if  an  orchard  could  in  some  way  be 
;  '  :~    made  to  yieW  double  its  original  crop,  though  its  yield  in 


8aa*l 


TBBM  BAflS  OV  IM'JJUUtW 


369 


the  physical  sense  would  be  doubled,  ia  the  seme  of  the 

rate  of  interest  its  yield  would  not  be  necessarily  ^ 
affected  at  all  —  certainly  not  doubled.   For  the  orchard  \  ^  '  j^f 
whose  yield  of  apples  should  increase  from  $1000  worth  to  \ 
$3000  worth  woidd  itself  correspondingly  increase  in  value.    \     \  <>v 
For  some  reason  or  other,  people  would  find  themselves  call-     )    '  ^ 
ing  it  a  $40,000  orchard  instead  of  a  $20,000  orchard ;  and  /    ^  ^  f^l- 
theratioof  theincometothecapital-valuewouldthenremain  /  < 
just  what  it  was  before,  namely,  five  per  cent.    Of  course^ 
it  is  true  that  if  an  orchard  which  had  already  been  bought 
for  $20,000  on  the  assimiption  that  it  woxUd  yield  only  $1000 
worth  of  crops  per  year  should  in  some  way  be  doubled 
in  productivity,  the  owner  would  be  making  ten  per  cent 
on  his  original  investment,  for  his  original  investment  was 
made  before  either  he  or  the  man  who  sold  it  to  him  knew 
that  the  orchard  would  increase  in  productivity.  Had  the 
purdiaser  known  this  fact  in  advance,  he  would  have 
been  quite  willing  to  pay  more  thnn  the  $20,000  which  we 
have  supposed  him  to  pay ;  and  as  soon  as  this  new  knowl- 
edge is  acquired,  he  will  revalue  the  orchard  according  to 
his  new  ezpectatkms.    Realizations  do  not  always  or  even 
uwialty^n-e^nd  to  expec^ 
rate  of  intpfp«tt  ftpplift^  g"^y,f"  "T^f^^j'-tiTMiH. 
productivity  of  the  ordiard  or  of  any  other  article  of 
wealth  wui  raraTits  value  also.    The  idea  of  raising  ffie 
rate  oT  interest  by  increasing  the  productivity  <rf  capital  is, 
therefore,  like  the  idea  of  raising  one's  sdf      one's  boot 
straps. 

f  a.  Tto  SodaHrt  Thteiy 

So  much  for  the  productivity  theory.  We  have  next  the 
socialist  theory.  The  sodaKst  has  tbe  Mea  tibat  hiUvert^ 
is^robbery.   He  says  "  it  is  all  wrong  that  tte  wtpitalist  wfe / 

something  for  nothing,  and  that  is  interest  v  interest  is    1-7  , 


iJO      KLEMXHfSMMX  ftOICDUS  OT  lOOIfOIIICi   ICntf.  XX 


nbboy;  interett  is  luddng  Uie  Mood  out  ot  womibo&y 

else,  viz.,  the  workman."  According  to  the  socialist  theory, 
especially  as  r'  r>resented  by  Karl  Marx,  interest  is  exploi- 
tation. The  socialists  say  that  labor  produces  capital,  and 
therefoze  produces  the  interest  from  capital,  and  therefore 
labor  should  get  all  the  income  from  capital ;  and  since 
the  laborer  does  not  get  it  all,  it  must  be  true  that  it 
is  held  back  by  somebody  who  is  in  a  position  of  van- 
tage to  steal  it  This  is  the  key  of  so-called  "  scientific 
socialism."  There  are  many  motives  for  socialism,  but  so 
far  as  it  has  an  economic  theory  behind  it,  this  is  that  theory. 
According  to  it,  the  capit^t  holds  a  club  over  the 
woricman  and  virtually  says :  "  If  you  will  come  to-day  and 
work  for  me,  I  will  give  you  half  of  what  you  produce ;  I 
have  got  the  capital,  and  you  can't  get  on  without  me,  and 
therefore  I  am  in  a  position  to  rob  you.   Take  what  voli 


The  socialist  theory  involves  two  propositions :  first,  that 
all  income  and^  capital       practically  produced  by  labor ; 


nearly  correct  than  the  second.  We  need  not  contest  it  in 
order  to  see  the  fimdamental  error  in  the  theory  of  socialism. 
Let  it  be  granted  that  practically  every  instrument  of  pro- 
duction is  produced  by  labor;  let  it  be  granted  that  the 
capitalist  is  always  living  on  the  product  of  past  labor; 
that  a  millionaire  who  gets  his  income  from  railroads,  ships, 
and  houses,  all  products  of  labor,  is  reaping  what  labor 
sowed ;  that  the  capitalists  of  to-day  are  receiving  compotuid 
interest  on  the  labor  of  bygone  times. 

It  does  not  follow,  however,  that  injustice  has  been  done 
to  the  laborer.  Let  us  consider  the  case  of  a  tree  which  is 
idantMi  with  (me  dollar's  worth  oi  Uhor,  and  twenty-five 
years  later  is  worth  three  dollars.  The  socialist  virtually 
asks,  "  Why  should  not  the  laborer  who  planted  the  tree 
receive  three  dollars  instead  of  one  dollar  for  his  work?" 


can  get,  or  get  nothing. 


8m.  3l 


mt  SMB.  09  IHI'littT 


37» 


The  answer  is  that  he  may  receive  it,  provided  he  will  wait 
tmaty-int  years  for  it  I  As  Bdhm-Bawerik,  an  authority 

on  interest,  says :  "  The  perfectly  just  proposition  that  the 
laborer  should  receive  the  entire  value  of  his  product  may 
be  understood  to  mean  either  that  the  laborer  should  now 
receive  the  entire  pnsmt  value  of  his  product,  or  should 
receive  the  entire  future  value  of  his  product  in  the  future. 
But  Rodbertus  and  the  socialists  expound  it  as  if  it  meant 
that  the  laborer  should  now  receive  the  entire  future  value 
ci  his  product" 

It  would  be  a  mistake  to  say  that  there  is  no  exploitation  ^\ 
of  laboring  men  by  capitalists,  because  we  know  the  contrary  / 
to  be  a  fact,  but  it  would  likewise  be  a  mistake  to  condemn 

all  ^'^^t^^H  thiBi  gm»*V*        •wplft<»«»l«wi     Th»  hmA  nt  \ 

interest  is  much  deeper.   It  -lies  in  thfr  preference  for 
pres<>nt  over  futuie^goods.  Neither  the  employer  nor  the  f 
employee  likes  to  wait  a  long  time  for  the  fruits  of  any  i 
enterprise  in  whidi  he  mgages.   But___ioaad)ndy  miwt  / 
wait^  and  irtinflYTT  ***Tt  M  %  "^"^  »n  »»m»  ^ 

rejgyBL 

S  3.  Impatience  the  Source  of  Interest 

The  essmce  of  interest  is  impatience^  the^de^jgjMLobtain 
gratifications  earlier  than  we  can^  tbem,  the  prefflfcnce  for 
paOAlpva^  Tt  k  a  fimrtammtil  ■ttrihntfrof 

hunuua  nature ;  ""^  M  jffl^  H  ft  tSI^^,  »ltt-A*w> 
be  a  rate  of  interest.  , 
^(P  ^    Intarest  is,  as  it  were,  himaan  impatience  crystallized  into  a 
i  '*^^    \maricetiftte.  Themarketrateof  interest  is  formed  out  of  the 
various  degrees  or  rates  of  impatience  in  the  minds  of  different 
p^Iel    The  rate  of  impatience  in  any  individual's  mt 
his  preferau»  for  an  additional  dollar,  or  one  dollar's 
goods,  availabte  to^y,  over  an  additimial  doBtf,  or  dollar's 
worth  of  goods,  available  a  year  from  to-day.    In  other 
W)k.*9t  it  ia  the  excess  of  the  maigMial  dcsirahility  oi 


37*     uaiBiTiunr  wmaruM  ov  ■cowoinoi  |Quv.xx 


to^^ijr^  goods  over  the  aaargiiMJ  derintMity  of  nert  y^t 

goods  viewed  from  tohday^s  standpoint.  It  can  be  expressed 
in  numbers  as  the  pretafiiEii  tEat  a  man  is  willing  to  pay  fw 
this  year's  over  next  year's  goods.  If,  for  instance,  in  order 
to  get  $x  to-day  he  is  wflUng  to  promise  to  pay  $1.05  next 
year,  then  his  rate  or  degree  of  unpatience  b  said  to  be  five 
per  cent.  The  present  |i  is  worth  to  him  so  much  that  in 
order  to  get  it  he  is  willing  to  pay  for  it  five  per  cent  more 
than  $1  in  the  future;  it  is  the  wOUi^aess  to  do  thb  to 
gratify  one's  impatience  which  causes  t^  {dienomenon  of  a 
rate  of  interest.  A  man  will  prefer  to  have  a  machine  to-day 
rather  than  a  machine  in  the  future ;  a  house  to-day  rather 
than  a  iMnue  a  year  from  now;  a  {drae  erf  hmd  to-day  rather 
than  a  piece  of  land  when  he  is  ten  years  older ;  he  would 
rather  have  some  food  to-day  than  wait  until  next  year  for 
it,  or  for  a  svdt  of  dotheit,  or  stocks  or  bonds,  or  anythin,  - 
cise« 

But  what  are  these  present  and  future  "goods"  which  ai« 
thus  contrasted?  At  first  sight  it  might  seem  that  the 
"goods"  compared  may  be  indiscriminately  wealth,  pn^ 
erty,  or  benefits.  But  when  present  capital  (whether 
capital-wealth  or  capital-property)  is  preferred  to  futuxe 
capital,  this  preference  is  really  a  preference  for  the  income 
of  the  first  capital  as  compared  with  the  income  of  the  second. 
The  reason  why  we  would  dioose  a  pfcsent  fruit  tree  rather 
thaji  a  similar  fruit  tree  available  in  ten  years  is  that  the 
fruit  of  the  first  will  available  earlier  than  that  of  the 
seocmd.  The  reason  we  prefer  immediate  tenancy  of  a  house 
to  the  right  to  occupy  it  in  six  months  is  that  the  uses  of  the 
house  will  begin  six  months  earlier  in  the  one  case  than  in  the 
other.  In  short,  capital-wealth  available  early  is  preferred 
to  cqjital-wealth  of  'ike  kind  available  at  a  more  remote 
time,  simply  because  the  ineome  of  the  former  is  avaOaMe 
earlier  than  the  income  of  the  latter.  For  the  same  reason 
early  capital-property  is  preferred  w  late  capital-property 
<rf  a  simiUur  Idnd ;  for  property  is  merely  a  claim  to  future 


m  BAtzi  or  imsiiff 


173 


faMome;  aadfheetifiMr  the  property  is  acquired,  the  wrikr 
win  the  income  accrue,  the  li^t  to  which  coaetittttM 

property  in  question. 

Thus,  impatience  for  goods  of  any  kind  resolves  itself  into 
inq)>tteiceJor  mcbmer — prelcrence  tor  hnmwWate  ii^ 
com  over  remote  Imcmh*.  Moceover,  the  preference  for 
immediate  income  over  remote  income  resolves  itself  into  the 
preference  for  present  tiyoyabU  income  over  future  mjoyaiie 
income.  The  income  from  an  artick  of  capital  wUdiooMisti 
merely  of  an  "interaction  "  is  desired  for  the  sake  of  the  final 
income  to  which  that  interaction  paves  the  way.  We  prefer 
present  bread-baking  to  future  bread-baking  because  the 
enjoyment  of  the  rmilting  bread  is  avaflaUe  eaifier  in  the 
one  case  than  in  the  other.  Present  weaving  is  preferred 
to  futiire  weaving,  because  the  earlier  the  weaving  takes 
place,  the  sooner  will  the  cloth  be  manufactured,  and  the 
ioooer  will  the  clothing  made  from  it  be  worn  by  the  coo- 
iumer. 

When,  as  is  usually  the  case,  exchange  intervenes  between 
the  weaving  and  the  use  of  the  iothes,  the  goal  in  the  process 
b  lomeiduit  obscured  fay  the  fact  that  the  mamtbctnier 
Wgud»  his  preference  for  present  weaving  over  future  weav- 
ing as  due  not  to  the  fact  that  the  clothes  will  be  more 
early  available  to  those  who  will  wear  them,  but  to  the  fact 
that  he  will  be  ambled  to  obtain  a  quidcer  income  by  adlii^ 
the  doth  earlier.  To  him  early  sales  are  more  advaatagBOils 
than  deferred  sales,  because  the  earlier  the  money  is  recdved, 
the  earlier  can  he  spend  it  for  his  own  personal  uses,  —  the 
didter  and  the  comforts  of  various  kinds  constituting  his 
real  income.  It  is  not  he,  but  his  customers,  whoce  prefer- 
ence for  present  doth  over  future  doth  is  based  on  the  earlier 
availability  of  the  c^/Am  which  can  be  made  from  it  But  in 
both  cases  the  mind's  eye  is  fixed  on  some  ultimate  enjoy- 
able income,  benefits,  to  ^idi  the  i&teiactin  in  ^pKS- 
tion  is  a  mere  preparatory  step. 

The  same  prindples  apply  where  corporations  or  firms 


374       XUMZNTAKY  ntlNCIFUS  OT  BOONOMICI  fOur.  XX 


borrow  and  lend.  Here  thr  relation  of  en|oyabfe  iaoome 

if  more  indirect,  and  yet  it  is  still  the  guiding  force.  For 
borrowing  and  lending,  when  directed  by  the  directors  of  a 
oomptay  on  behalf  of  tbe  ttockholden  or  bondholders,  have 
reference  to  the  enjoyable  income,  not  of  the  dh«cfeon,  but  <d 

the  stockholders  and  bondholders. 

We  ttius  mihajLaU_H?to^  over  future 

goom  molvet  itadf ,  in  the  Uutt^analysU^  into  a  Jirejereme 
for  early  enjoyable  income  over  iat9M^^^atk.imomi  Every 
preference  for  present  over  future  goods  reduces  itself, 
therefore,  to  this  preference  for  present  over  future  latis- 
&ctiou. 

The  preference  for  present  over  future  goods,  iHua  thtu 
reduced  to  its  lowest  terms,  rids  the  values  of  the  contrasted 
present  and  future  goods  of  the  interest  element,  which, 
in  aU  other  attempts  at  ecphmation,  is  so  unconsciously 
presupposed.  When  any  other  goods  than  enjoyable  in- 
come are  considered,  their  values  already  imply  a  rate  of 
intoest  When,  for  instance,  we  say  that  interest  is  the 
premium  rm.  the  vahie  of  a  presat  house  over  that  of  a  future 
house,  we  still  leave  the  problem  of  interest  unsolved;  for 
we  forget  that  the  value  of  each  house  —  the  future  one  not 
jess  than  the  present  one  —  is  itself  based  on  a  rate  of  in- 
terest As  we  have  seen,  the  price  of  a  house  is  the  dis- 
counted value  of  its  future  income,  and  in  the  procev  of 
discounting  there  always  lurks  a  rate  of  interest.  When 
we  compare  the  values  of  present  and  future  houses,  there- 
fore, both  terms  of  the  amiparistm  involve  the  rate  of 
interest.  But  when  present  enjoyable  income  is  compared 
with  future  enjoyable  income,  the  case  is  different,  for  the 
value  of  enjoyable  income  involves  no  interest  whatever. 

We  have  thus  reduced  the  problem  of  determining  the 
rate  of  interest  to  the  problem  of  determining  the  premium 
which^  people  are  wilUng  to  pay  for  present  enj(^able  in- 
come in  terms  of  futiue  enjoyable  income. 


CHAPTER  tXXI 


1MFLUXKCB8  ON  OIPATIENCX  rOK  mCOMX 

I  z.  DMteWQCW  in  Impatience  Due  to  DIfftnaoti  fai 
Httnum  Nature 

But  we  have  not  yet  wholly  solved  the  joMnnoi  Interest. 
It  is  not  enough  to  know  that  the  more  impatient  a  people 
are,  the  higher  will  be  their  rate  of  interest,  and  the  more 
patient  th^  an,  the  lower  will  be  thefar  rate  d  intcfeat 
We  must  also  know  on  what  causes  the  degree  or  rate  of 
impatience  depends.  It  depends  principally  upon  the 
character  of  the  individual  and  the  diaracter  of  the  income 
which  he  poMeaies.  It  is  dear  that  the  de^  of  inq  >a- 
tience  whidi  corresponds  to  a  ^>edfic  income-stream  will  not 
be  the  same  for  everybody.  One  man  may  have  a  degree 
or  rate  of  impatience  of  five  per  cent  and  another  a  rate  of 
impatieiice  of  ten  per  cent,  althouf^  both  have  the  same 
income.  The  differeooe  wOl  be  due  to  a  difference  in  the 
personal  characteristics  of  the  individuals.  These  charac- 
teristics are  chiefly  five  in  number :  (i)  foresight,  (2)  self- 
control,  (3)  habit,  (4)  expectation  of  Hfe,  (5)  love  for  pos- 
terity.   We  shall  take  these  up  in  order. 

(i)  First,  as  to  foresight.  Generally  speaking,  the  greater 
the  foresight,  the  less  the  impatience,  and  vice  versa. 
In  the  case  of  primitive  races  and  uninstructed  daaaes 
of  society,  the  future  is  seldom  considered  in  its  true  pro- 
portions. The  story  is  told  of  a  shiftless  householder  who 
would  not  mend  his  leaky  roof  whoi  it  was  raining,  for  fear  of 

its 


376     SUMSMTAKY  VIIMCIFLES  Of  ECOMOlOCS    fCur.  XXt 


getting  more  wet,  nor  when  it  was  not  raining,  because  he 
did  not  then  need  shelter.  Among  such  persons  impatk^ce 
for  present  gratification  is  powerful  because  their  '  oaipre- 
hension  of  the  futiure  is  weak.  If  we  compare  th<  Scotch 
and  the  Irish,  we  shall  find  a  contrast  in  this  respect. 
The  Irish,  in  general,  lack  foresight  and  are  imprvViiCiit^ 
and  the  Scotch  have  foresight  and  are  provident.  Conse- 
quently the  rate  of  interest  is  high  in  Ireland  and  low  in 
Scotland. 

These  differences  in  degrees  of  foresight  produce  corre- 
sponding differences  in  the  dependence  of  impatience  on 
the  character  of  income.  Thus,  for  a  given  income,  say 
liooo  a  year,  the  reckless  might  have  a  rate  of  impatience 
oi  ten  per  cent,  when  the  forehanded  would  experience  a 
rate  of  only  five  per  cent.  Therefore,  impatience,  in 
general,  will  be  greater  in  a  community  consisting  of 
reckless  individuals  than  in  one  consisting  of  the  opposite 
type. 

(2)  We  come  next  to  self-control.  This  trait,  though 
distinct  from  foresight,  is  usually  associated  with  it  and  has 
very  similar  effects.  Foresight  has  to  do  with  thinking,  self- 
control  with  w^ng.  A  weak  will  usually  goes  with  a  weak 
intellect,  though  not  necessarily,  and  not  always.  The 
effect  of  a  weak  will  is  similar  to  the  effect  of  inferior  fore- 
sight. Like  those  workingmen  who  cannot  carry  their  pay 
home  Saturday  tdgjbt,  but  spend  it  in  a  grogahc^  on  the 
way,  many  persons  cannot  deny  themselves  any  present 
indulgence,  even  when  they  know  definitely  what  the  con- 
sequences wUl  be  in  the  future.  Others,  on  the  contrary, 
have  no  difficulty  in  amtn^Ung  themidvet  in  tlw  face  of 
all  temptations. 

(3)  The  third  characteristic  of  human  nature  which  needs 
to  be  considered  is  habit.  That  to  which  one  is  accus- 
tomed exerts  neceasaiQy  a  powerful  influence  upon  hb 
valuations  and  therefore  upon  his  impatience.  This 
influence  may  be  in  either  directicm.    A  rich  mux's 


Sic  i]    influences  on  impatience  for  income 


son  who  has  been  brought  up  with  expenrive  habits, 
when  he  finds  himself  with  a  smaller  income  than  his 
father  provided  him  during  his  formative  years,  will  be 
mart  impatient  for  income  than  a  man  who  has  this 
same  income  but  who  has  climbed  up  instead  of  dimbed 
down. 

(4)  The  expectation  of  life  will  affect  a  man's  degree  of 
impatience.  Amanwholooks  forward  toa  long  life  will  have 
a  relatively  high  i^preciation  of  the  future,  which  mean 
a  relatively  low  appreciation  of  the  present,  i.e.,  a  low  degree 
of  impatience ;  whereas  a  man  who  has  a  short  life  to  look 
forward  to  will  want  it  at  least  to  be  a  mmy  one.  "  Eat, 
drink,  and  be  merry,  for  to-morrow  we  die  "  is  the  motto 
applying  to  this  type. 

(5)  The  fifth  dromistance  is  love  for  posterity.  Prob- 
al^  the  most  powerful  cause  tending  to  reduce  the  rate  of 
interest  is  love  for  one's  children  and  the  desire  to  provkie 
for  their  good.  When  these  sentiments  decay,  as  they  did 
decay  at  the  time  of  the  decline  and  fall  of  the  Roman 
Empire,  and  it  becomes  the  fashion  to  exhaust  wealth  in 
self-indulgence  and  leave  little  or  nothing  to  offqwing,  the 
rate  of  impatience  and  the  rate  of  interest  will  be  high. 
At  such  times  the  motto,  "  After  us  the  deluge,"  indicates 
the  feverish  de^  to  squander  in  the  present,  at  whatever 
oost  to  the  futiue.  A  noted  gambler,  who  had  led  a  wfld 
an  I  selfish  life,  once  said,  when  life  insxirance  was  first 
explained  to  him,  "  I  have  seen  many  schemes  for  making 
money,  but  this  is  the  first  time  I  have  seen  a  scheme  where 
3rou  had  to  die  Mon  you  ooidd  rake  in  the  pHe."  That 
man  did  not  care  for  a  payment  which  would  come  in  after 
his  death.  But  there  are  many  men  who  do,  and  in  fact 
care  mudi  more  for  it  than  for  anything  else  in  the  world. 
This  care  leads  them  to  insure  their  lives  in  ordor  thi^ 
may  leave  the  money  to  their  families.  Their  desL%  to 
(Movide  for  those  who  survive  them  tends  to  make  them 
more  patient, ».«.,  tends  to  reduce  th^  impatience  to  enjoy 


378     ELEMENTARY  PRINCIPLEr  Of  ECONOMICS     [Cbap.  XXI 

income  immediately.  Life  insurance,  by  training  people  to 
provide  for  posterity,  is  acting  as  one  of  the  most  powerful 
means  of  lowering  the  rate  of  impatience  and  therefore  the 
rcte  of  interest.  AtpresoitintheUnitedStatestheirourance 
on  lives  amounts  to  $20,000,000,000.  This  represents,  for 
the  most  part,  future  income  to  be  received  by  the  next 
generation  by  reason  of  sacrifices  of  income  made  by  the 
present  generation.  These  sacrifices  spring  from  a  low 
rate  of  impatioice,  and  tend  to  produce  a  low  rate  <A 
interest. 

Thus  we  see  that  men  may  differ  in  many  ways  which 
affect  the  rate  of  interest  and  the  rate  of  impatience. 
We  may  contrast  two  extreme  types  of  men.  Men  who 
are  shortsighted,  or  weak  willed,  or  have  the  habits  of  a 
q)endthrift,  or  look  forward  to  a  short  or  uncertain  life, 
or  are  sdfish  and  have  no  regard  for  posterity,  will  (other 
things  equal)  have  a  high  degree  of  impatience.  M«i 
who  possess  foresight,  self-control,  habits  of  thrift,  con- 
fidence in  length  of  life,  and  altruism  with  respect  to 
posterity,  will  (other  things  equal)  have  a  low  degree  of 
impatioice. 

S  a.    Differences  in  Impatience  Due  to  DiffuiBces  in 

Income 

But  not  only  does  impatience  vary  as  between  different 
individuals ;  it  varies  also  for  the  same  individual  according 
to  drcumstances.  The  most  important  drcimutance  affect- 
ing a  person's  degree  of  impatience  is  the  character  of  his 
expected  income  in  the  immediate  and  in  the  remote  future. 
One's  impatience  for  satisfactions  will  vary  inversely  as 
the  abundance  of  his  immediate  as  compared  with  his  remote 
satisfactions.  If  the  future  satisfactions  which  he  expects 
and  looks  forward  to  are  very  great,  and  his  present  satis- 
factions are  very  small,  he  will  be  impatient  to  hurry  from 
Us  present  scarcity  and  arrive  at  the  expected  future  aban- 


Sic.  3]     INVLUENCES  ON  IMPAIIENCE  70S  INOOIIB  379 


dance;  that  is,  he  will  have  a  high  rate  of  preference 
for  present  over  future  satisfactions.  This  is  on  the  same 
principle  that  prices  are  high  when  goods  are  scarce.  The 
preference  for  present  satisfactions  is  high  if  present  satis- 
foctions  are  scarce.  Now  one's  impatience  to  bring  future 
satisfactions  nearer  the  present  will  depend  on  one's  whole 
future  stream  of  satisfactions,  i.e.,  what  we  call  his  final 
enjoyable  inc(»ne.  It  will  dq>end  on  three  chief  charac- 
teristics of  that  income :  first,  as  just  said,  it  will  depend  on 
its  distribution  in  time,  i.e.,  the  relative  abimdance  of  his 
immediate  as  compared  with  his  remote  satisfactions; 
secmidly,  on  the  amounf  of  the  income,  i.e.,  whether  his  satis- 
factions are,  as  a  whole,  scant  or  abundant ;  thirdly,  on  the 
uncertainties  of  the  income,  i.e.,  to  what  extent  his  satisfac- 
tions throughout  future  years  are  subject  to  chance,  that  is, 
may  turn  out  to  be  greater  or  less  than  he  first  eipected. 


I  3.  iBflnMee  of  th«  Distribution  in  Tlnw  of  tiM 

stream 


We  have  first  to 

consider  the  in-  2400 

fluence  which  the  2200 
distribution  in 

tune  of  mcome  ,^00 

has  upon  the  im-  1400 

patience  for  in-  laoo 
come.  Threedif- 

ferent  types  of  ^ 

distribution    in  400 

time   may    be  soo 

iftio  li    1?  "n   W  1ft 

mnform  mcome, 
consisting  of  equal  yearly  items,  as  represented  by 
the  dark  lines  in  Figure  41  (in  wUch,  as  in 
pitevkiiut  diagrams,  the  heights  of  the  successive  vertical 


380    XLEMENTAXY  PIINCIPUE8  OV  KONOMICS     (Crap.  XXI 


tteo 


2200 
2000 
laoo 
I600 
i<«oo 

.I200 
iOOO 
SOD 
600 
400 
SCO 


lines  represent  the  amounts  of  the  successive  instaUmcnts 
of  income,  say  $1900  a  year);  increasing  income,  as 

represented  in 
Figure  42  ^ 
which  the  income 
is  supposed  to 
increase  from 
1x300  a  year  in 
191 1  to  nearly 
$3000  in  191 7); 
and  decreasing 
income,  as  repre- 
sented in  Figure 
43  (in  which  the 
income  is  sup- 
posed to  decrease 
fromalmost$3ooo 
in  191 I  to  about 
|z3oc  in  1917). 


itio  )i  It 


'13  t4 

Rn.  43. 


The  effect  of  possessing  an  increasing  income  (fig.  43)  is,  as 
we  have  already 
indicated,  tomake  3^ 
the  possessor  im-  caoo 
patient    to   get  2«oo 
the  larger  income 
which  the  future 
holds  or  keeps 
back.  Amanwho 
is  now  enjoying 
an  income  of  only 
$zooo  a  year,  but 
txpecta  in  ten 
years    to  be 
enjoying  one  of 
|zo,ooo  a  year, 
win  be  impatient 


2*00 

ssoo 

SOOO 
I  BOO 

leoQ 

I400 

1200 
•000 
800 
600 

200 


'II  *m  '13  '14       '«  1? 


Sa&4i   mtuiKCBS  ON  mpAimcB  roR  nfooMB  381 


to  have  those  ten  years  elapse.  He  has  "  great  expecta- 
tkni."  He  may,  to  satutfy  his  hnpatlence,  borrow  money 
to  fkc  out  this  year's  income,  and  m.ike  repayment  by 
sacrificing  from  his  more  abimdant  income  ♦en  years  later. 

Reversely,  a  gradually  decreasing  income  (Fig.  43),  mak- 
ing, as  it  does,  the  earlier  income  rdativdy  abundant,  and 
the  remoter  income  relatively  scarce,  tends  to  reduce  impa- 
tience, or  the  preference  for  present  as  comparetf  ith  future 
income.  The  man  with  a  descending  income  already  has 
a  high  income  without  bdng  compdled  to  wait  for  it.  With 
him  there  is  little  reason  for  impatience  —  there  is  nothing 
to  be  impatient  for ;  on  the  contrary,  the  future  does  not 
look  at  all  inviting.  The  outlook,  so  far  from  tending  to 
make  him  borrow,  tends  to  make  him  wish  to  save  fxmn 
his  present  abundance  to  provide  for  his  coming  need. 

The  extent  of  these  effects  will,  as  we  have  ^ready  seen, 
vary  greatly  with  different  individuals.  Corresponding  to 
a  given  ascending  income,  one  individual  may  have  a  rate 
of  impatience  of  ten  per  cent  and  another  of  only  four  per 
cent.  What  we  need  here  to  emphasize  is  merely  at, 
in  the  case  of  both  of  these  individuab,  a  descen^g  in- 
come causes  a  lower  degree  of  impatience  than  an  ascoid- 

§  4.  Tnflwnce  of  the  Size  of  the  Income-itream 

We  have  conadered  the  dependence  of  impatience  for 
expected  income  on  the  distribution  of  that  income 
in  time.  Our  next  topic  is  the  dependence  of  impa- 
tience on  the  sue  ci  income.  In  general,  it  may 
be  said  that  the  smaller  the  income  a  man  has,  the  higher  is 
his  preference  for  present  over  future  income.  It  is  true 
that  a  small  income  implies  a  keen  appreciation  of  future 
wants  as  wdl  as  of  immediate  wants.  Poverty  bears  down 
heavily  on  all  parts  of  a  man's  life,  both  that  which  is 
immediate  and  that  which  is  remote.  But  it  ^^Hnm  the 


382     ELEMENTARY  nONCIPLIS  OF  EOOMOIOCS  Qur.ZZX 


desirability  of  immediate  income  am  more  than  of  futim 
income. 

This  result  is  partly  rational,  because  of  the  importance 
of  supplying  present  needs  in  order  to  keep  up  the  con- 
tinuity of  life  and  the  ability  to  cope  with  the  future ;  and 
partly  irrational,  because  the  pressure  of  present  needs 
blinds  one  to  the  needs  of  the  future. 

As  to  the  rational  side,  it  is  clear  that  present  income  is 
absolutely  indii^>aisable,  not  only  for  the  present,  but  even 
as  a  precondition  to  the  attainment  of  future  income.  One 
break  in  the  thread  of  Ufe  is  sufficient  to  destroy  all  future 
enjoyment.  It  is  of  the  utmost  importance,  therefore,  to 
keep  up  life.  As  the  phrase  is,  "  a  man  must  live,"  and  in 
the  present  a  man  must  keep  his  hold  on  life  in  order  to  have 
any  life  in  the  future.  If,  then,  a  man  were  on  a  desert 
island  and  had  only  such  rations  as  would  last  a  few  months, 
he  would  naturally  prdet  to  use  them  immediately  — 
q)aringly,  but  unmediately —rather  than  to  put  off  their  con- 
sumption ten  years ;  because  if  he  put  off  consuming  them 
he  could  not  consume  them  at  all ;  he  would  die  in  the  mean- 
time. And  in  general,  a  man  who  is  poor,  and  upon  whom 
poverty  presses  so  as  to  make  it  hard  to  make  both  ends 
meet,  will  always  have  a  higher  realization  and  ^^reda- 
tion  of  the  present  than  a  man  who  is  rich. 

As  to  the  irrational  side,  the  poorer  a  man,  the  more  his 
eyes  are  blinded  to  future  needs.  He  is  too  much  occupied 
with  the  need  of  the  present,  and  shuts  his  eyes  to  the 
future.  To  him  "  sufficient  unto  the  day  is  the  evil  thereof." 
We  an  suffer  from  lack  of  perspective,  and  tend  to  exaggerate 
the  needs  of  the  present.  Poverty  especially  tends  to  distort 
the  perspective.  Its  effect  is  to  relax  foresight  and  self- 
control,  and  tempt  one  to  "  trust  to  luck  "  for  the  future, 
a  only  the  all-absorbing  clamor  of  present  nwesstties  may 
thus  be  satisfied. 

We  see,  then,  that  a  sniall  income  tends  to  produce  a 
high  degree  of  impatience,  partly  from  lack  of  foresight 


Sac.  si     INILUZNCU  ON  IKPAXIDICX  Ktt  INOQlll  583 


and  sdf-control,  and  partly  from  the  thought  that  pro- 
vision for  the  present  is  neoenaiy  both  for  itadf  and  iot 
the  future  at  wdL 

§  5.  Influence  of  Uncertaintiea  of  Income 

The  next  influence  on  impatience  and  therefore  on  the 
rate  of  interest  consists  in  the  risks  or  uncertainties  attach- 
ing to  prospective  incomes.  Now  uncertainties  affect  im- 
patience in  several  different  ways.  In  general,  risks  tend 
to  raise  the  degree  of  impatience.  There  are  four  ways 
in  which  risk  tends  to  increase  impatience,  and  one  in  which 
it  tends  to  decrease  impatience. 

First,  we  know  that  if  a  loan  is  lisky,  the  rate  of  interest 
has  to  be  high.  If  the  repayment  of  a  loan  is  regarded  as 
uncertain,  this  uncertainty  to  the  lender  will  have  to  be 
offset  by  an  increase  in  the  rate  of  interest,  and  produces 
a  correspondingly  high  rate  of  impatience  m  the  case  of 
risky  loans.  The  rate  of  interest  on  risky  loans  thus  in- 
cludes, as  it  were,  an  element  of  insurance  against  loss. 
Strictly  speaking,  such  a  rate  is  not  pure  interest ;  for  we 
have  defined  a  rate  of  intoert  as  the  premium  pekl  for 
present  money  in  future  mon^,  (m  the  ^fTOmptfon  thai 
both  sums  are  certain. 

But  even  the  pure  rate  of  interest  —  the  rate  in  riskless 
lojuis  —  will  be  raised  by  risk  in  certain  ways.  One  way  in 
which  risk  tends  to  raise  the  rate  of  impatience  has  akeady 
been  mentioned  in  §  i,  namely,  when  the  risk  is  of  life, 
—  that  is,  of  its  terminating  before  the  lender  finds  himself 
able  to  enjoy  the  fruits  of  his  foan.  Thai  acts  like  the 
risk  in  the  loan  itself.  You  may  tell  a  man  he  is  perfectly 
sure  of  being  repaid  his  loan  fifty  years  from  now.  But 
wfll  he  five  so  k)ng?  It  is  cold  comfort  to  tell  him  he  is 
sure  to  get  his  money  after  he  k  dead  I  A  saikir  is  a  type 
<rf  man  who  is  constantly  taking  this  fact  into  account.  He 
knows  that  almost  any  day  he  may  be  shipwrecked,  and  the 


384  nnomxAiY  wamanu  ov  looiioiiici  ncaa.xa 


consequence  is  that  he  prefers  money  ready  to  spend  to-day 
to  money  available  only  next  year.  SaOon  an  prombial 
spendthrifts  and  have  a  proverbially  high  degree  oi  bap§r 

tience. 

The  third  case  is  where  the  receipt  of  the  income  itself 
is  imcertain,  its  uncertainty  applyfaig  alike  to  all  thnes. 
Such  a  condition  largely  explains  why  salaries  and  wages  are 
lower  than  the  average  earnings  of  those  who  work  for  them- 
selves. Those  who  choose  salaries  rather  than  profits  are 
willing  to  accept  a  small  but  sure  income  in  order  to  get 
rid  of  a  precarious  though  possibly  larger  one.  Since  a 
risky  income,  if  the  risk  applies  evenly  to  all  parts  of  the 
income-stream,  is  nearly  equivalent  to  a  low  income,  and 
smce  a  low  income,  as  we  have  seoi,  tends  to  intennfy  im- 
patience, risk,  if  uniformly  distributed  in  time,  must  tend 
to  increase  impatience. 

The  fourth  way  in  which  risk  tends  to  increase  impatience 
is  seen  where  immediate  income  is  ridcy  as  compared  with 
remote  income.  A  man  in  time  of  war,  when  there  is  pros- 
pect of  peace  in  the  future,  looking  forward  to  a  relatively 
safe  income  in  the  future,  will  have  a  high  degree  of  im- 
patience for  that  future  to  arrive,  because  the  present  risky 
income  is  in  his  eyes  not  equivalent  to  the  future  safe  income. 

These,  then,  are  four  ways  in  which  risk  tends  to 
increase  impatience.  There  is,  however,  one  way  in  which 
risk  tends  to  decrease  impatience.  Hie  histance  just  given 
is  one  in  which  income  in  the  immediate  future  is  risky,  but 
income  thereafter  safe.  That  sometimes  happens,  as  just 
indicated,  where  in  time  of  war  man  expects  peace  in  the 
future,  or  in  time  of  sickness  he  expects  to  get  wdl  and  re- 
sume his  regular  earning  power.  Nevertheless,  there  are 
nur  erous  examples  of  the  opposite  type,  where  the  risk 
applies  to  the  future  and  not  to  the  present.  If  a  ship  owner, 
for  iiMtance,  has  his  shq>  in  port  to-day,  but  h  going  to  tail 
within  a  few  months,  his  risks  are  high  in  the  future  as  onn- 
pared  with  the  present  £Qs  future  looks  dulnoia,  aad 


iM.  d    iNiLuiHcst  ON  mpATmicB  K»t  mooiii 


that  will  cause  him  to  be  less  impatient,  because  a  risky 
future  income  is  like  a  small  future  income,  and  we 
have  wn  that  a  mafl  future  faioome  tends  to  les- 
sen impatience.  An  income  which  gets  more  and  more 
risky  in  the  future  is  therefore  like  an  income  which  gets 
smaller  and  smaller  in  the  future.  In  actual  fact,  such  a 
type  is  not  unconuncm.  The  remote  future  is  usually  less 
known  than  the  immediate  future.  This  means  that  tttt 
risk  connected  with  distant  income  is  greater  than  that  con- 
nected with  income  near  at  hand.  The  chance  of  disease, 
accident,  disability,  or  death  is  always  to  be  reckoned  with, 
but  under  ordinary  circumstances  is  greater  in  the  remotft 
future  than  in  the  immediaLe  future.  Consequently  there 
b  usually  a  tendency,  so  far  as  this  influence  goes,  toward 
a  Um  degree  of  impatience.  This  tendency  is  caqumsed  in 
the  phrase  to  "  lay  up  for  a  rainy  day." 
^  Risk,  then,  operates  in  diverse  ways  according  to  diverse 
circumstances.  We  see  that  risk  tends  in  some  cases  to  in- 
crease and  in  others  to  decrease  the  degree  of  impatience. 
There  is  a  common  principle,  however,  in  all  these  cases. 
Whether  the  result  is  a  high  or  a  low  degree  of  impatience, 
the  primary  fact  is  that  the  risk  of  losing  the  income  in  a 
particular  period  of  time  opmtes  as  a  virtual  impovoish- 
ment  oi  the  income  in  that  period,  and  hence  increases  the 
estimation  in  which  it  is  held.  If  that  period  is  a  remote 
one,  the  risk  to  which  it  is  subject  makes  for  a  high  appre- 
ciation of  ranote  inonne  and  a  low  degne  of  impatience ;  if 
the  period  is  the  inunediate  future,  the  risk  make?  for  a 
high  appreciation  of  immediate  income  and  a  high  degree  of 
impatience;  if  the  risk  is  in  all  periods  of  time,  it  acts  as 
a  virtual  <tecrease  <rf  income  all  along  the  line  and  promotes 
a  high  degree  of  impatience.  From -a  practical  point  of 
^ew^  there  Js  no  factor  affec^ 

gportant  than  the  factor  jSfeiVrisk.  because 

^terest  always^  to  do  witlrl3BS[^«d  the  future  is 

ahwty»nnc**»*»r*i 
*c 


S86   iLiiiBifTm  ruMcmit  or  looiromci  |CMr.x3a 


§  6.  Sumnuuy 

The  impatience  of  any  individual  depends,  then,  partly 
on  the  character  of  that  individual's  income,  is,,  on  three 
diancteifatia<rfiiw(»ne:  — 

(i)  its  distribtttioii  in  time, 

(a)  its  amount, 

(3)  its  uncertainties. 

This  propoiition  —  that  the  prdoence  of  any  individual 
for  immediate  over  remote  income  depends  upcm  the  nature 
of  his  prospective  enjoyable  income  —  corresponds  to  the 
proposition  in  the  theory  of  prices,  that  the  marginal  desir- 
ability ci  any  article  depend*  upon  the  quantity  of  that 
article ;  both  prqxiiitions  are  fundamental  in  tlieir  re^ec- 
tive  spheres. 

We  see,  then,  that  a  man's  impatience  depends  (i) 
iqxm  his  nature,  and  (2)  upon  his  income.  In  the  following 
illustrative  table  we  see  contrasted  the  sappotied  extreme 
types  of  income  and  of  human  nature,  and  see  how 
impatience  will  differ  among  the  four  extreme  cases  here 
represented. 


DacuRioN  or  Ihooks 

OmnroMMiio  Kmi  or  fjiMTWuw 

TO  AN  ImHVIDUAX.  WBO  a 

Short-sighted,  weak- 
triUad,  accuttonwd 

Far-»Ighted,  idf-coii* 
trolled,  accuitomed  to 
uve,  desirous  to  pra- 
vide  for  hdn 

Small 
Large 

BBSS&= 

Increasing 
Decreasing 

Precarious 
Assured 

5% 

5% 
1% 

If  we  compare  the  figures  in  the  same  vertical  column,  we 
lee  that  the  lower  figure  is  the  nnaller,  exfrnsring  the  in- 
fluenceof  the  characterof  income.  If  we  compare  the  figures 
in  the  same  horizontal  line,  we  see  that  the  right-hand  ^uie 


skU   wfunDicM  OM  nnAimici  iok  mooiib  587 


it  the  mailer,  expressing  the  hifluenoe  of  hiunan  nature. 
But  a  man  may  have  an  income-stream  of  a  kind  which 

tends  to  inflame  his  impatience,  and  at  the  same  time  a 
nature  of  a  kind  which  tends  to  allay  hit  impatience.  The 
result  win  then  be  a  compromise  rate  of  impatience,  say 
five  per  cent.  Or  a  man  may  have  an  tocome-stream  which 

tends  to  keep  his  impatience  low,  and  a  nature  which  tends 
to  keep  it  high.  Thus  five  per  cent  is  found  twice  in  the 
table  fcmning  a  diagonal.  Hie  other  diagonal  shows  the  con- 
trast between  the  extreme  where  both  the  character  of  the 
income  and  the  nature  of  the  individual  conspire  to  make  a 
very  high  degree  of  impatience,  and  the  opposite  extreme 
where  they  con^^  to  inake  a  very  low  degree  of  impatience. 

The  same  kdividttal  may,  in  the  course  of  his  life,  diange 
from  one  extreme  of  impatience  for  income  to  the  other. 
Such  a  change  may  be  due  to  a  change  in  the  person's 
nature  (as  when  a  spendthrift  is  reformed  or  a  man,  origi- 
nally prudent,  becomes,  through  intenqtorance,  reckkss  and 
thriftless),  or  to  a  change  in  his  income,  whether  in  respect 
to  size,  distribution  in  time,  or  uncertainty.   Every  one  at 
samt  thnes  in  his  Ufe  doubtless  changes  his  degree  of  unpa- 
timce  for  income.   In  the  course  of  an  <»dinary  lifetime  the 
changes  in  a  man's  degree  of  impatience  are  probably  of 
the  followmg  general  character :  As  a  child  he  will  have  a 
high  degree  of  unpatience  because  of  his  lack  of  foresight  and 
self-omtrol.   When  he  reaches  the  age  of  young  manhood 
he  may  still  have  a  high  degree  of  impatience,  but  for  a  dif- 
ferent reason,  viz.  because  he  then  expects  a  large  future 
income.    He  expects  to  get  <m  in  the  world,  and  he  will 
have  a  high  degree  of  impatience  because  of  the  relative 
abundance  of  the  unagined  future  as  compared  with  the 
realized  present.    When  he  gets  a  little  farther  along,  and 
has  a  family,  the  result  will  be  a  low  degree  of  impatience, 
because  then  the  needs  of  the  future  rather  than  the  endow- 
ment of  the  future  will  appeal  to  him.   He  will  not  think 
that  he  is  going  to  be  so  very  rich  in  the  future;  on  the 


^    SLUOMTAIY  nXMCIFLBt  Of  ■OOWOailCT    (CaAr  XXl 


oontniy,  1m  idU  iiMMkr  iMm  1m  it  |oii«  to  gtt  along  iB  the 

future  because  he  will  have  so  many  mouths  to  feed.  He 
looks  forward  to  the  future  expenses  of  his  wife  and  children 
with  the  idea  of  providing  for  them — an  idea  which  makes 
for  «  high  relative  legaid  for  the  future  and  a  low  relative 
regard  for  the  present.  Then  when  he  gets  a  little  older, 
and  his  children  are  married  and  gone  out  into  the  world 
and  are  taking  care  of  themselves,  he  again  has  a  high 
degree  of  impatience  for  hicfmie,  because  he  expects  to 
die,  and  he  thinks,  "Why  shouldn't  I  enjoy  myself  during 
the  few  years  tliat  remain  inffttftd  of  piUng  up  i<a  the 
remote  future?" 


CHAPTER  XXn 

SB  0C1SI1IINATI0N  Of  TBI  lAlB  Of  UHMlSf 

§  X.  Bqualizing  Marginal  Rates  of  Tmpattonct  bj 

Borrowing  and  Lending 

In  the  preceding  chapter  we  saw  that  the  rate  of  prefer- 
ence tc€  {msent  over  future  goods  is,  in  the  last  analysis, 
a  prefereace  lor  immediate  over  remote  income ;  that  this 
preference  depends,  for  any  given  individual,  upon  the 
character  of  his  income-stream,  —  its  size,  its  distribution 
in  time,  and  its  uncertainties ;  and  that  the  nature  of  this 
dependence  varies  with  differait  individiials. 

The  question  now  arises :  What  relation  do  these  differ- 
ent "  rates  of  preference  "  of  different  individuals  luve  to 
the  rate  of  interest  ? 

FcMT  the  moment  let  us  assume  a  perfect  market,  in 
whidi  the  element  of  risk  is  entirely  lacking,  both  with 
ttspKt  to  the  certainty  of  the  expected  income-streams 
bekmging  to  the  different  individuals,  and  with  respect  to 
the  certainty  of  reiMiyment  ias  \okom.  In  other  words,  we 
aasume  that  all  individuals  are  initially  possessed  of  fore- 
Imown  income-streams,  and  are  free  to  exchange  any  parts 
of  them,  that  is  any  present  or  immediate  income  for  any 
future  or  remote  income.  Prior  to  such  exchange,  the 
income-stream  is  supposed  to  be  fixed  in  size  and  distri- 
bution in  time ;  that  is,  the  capital  instnunents  which  the 
individual  possesses  are  each  supposed  to  be  capable  of 
01^  a  fka^  definite  series  <rf  beaefite  ccntEfibo^^  to 


390  KLMMExmax  njscautB  or  meonKaacs  [Ouv.xxn 

Under  these  hypothetical  conditions,  the  rates  of  impa- 
tience  for  di£ferait  individuals  woukl  become  perfectly 
equalized. 

For  if  any  particular  individual  has  a  rate  of  impatience 
above  the  market  rate,  he  wiU  sell  some  of  his  surplus 
future  income  to  obtain  {i.e.,  "  borrow")  an  addition  to  his 
present  meager  mcome.  This  will  have  the  rffect  of  de- 
creasing the  desirability  of  his  present  income  and  increas- 
ing the  desirability  of  the  remaining  future  income.  The 
process  will  continue  until  the  rate  of  impatience  of  this 
individual  is  equal  to  the  rate  of  interest.  (In  other 
words,  a  person  whose  impatience  rate  exceeds  the  cur- 
rent rate  of  interest  will  borrow  up  to  the  point  at  which 
the  two  rates  will  be  equal.  P*«  ersely,  a  man  who,  with 
a  given  income-stream,  has  a  rate  of  impatioice  below  the 
market  rate,  will  sell  (i.e.,  "  lend  ")  some  of  his  abundant 
present  income  to  eke  out  the  future,  the  effect  being  to 
incmse  his  rate  of  impatience  until  it  also  harmonizes 
with  the  rate  of  interest. 

To  put  the  matter  in  figures,  let  us  suppose  the  rate  of 
interest  is  five  per  cent,  whereas  the  rate  of  impatience  of  a 
particular  individual  is  at  first  ten"  per  cent.   Then,  by 
hypothesis,  the  individual  is  willing  to  sacrifice  |i.io  of  next 
year's  income  in  exchange  for  $i  of  this  year's.   But  in  the 
market  he  is  able  to  obtain  $i  for  this  year  by  sacrificing  only 
I1.0S  of  next  year's  mcome.   This  ratio  is,  to  him,  a  cheap 
price.   He  therefore  borrows,  say,  fxoo  for  a  year,  agreeing 
to  return  $105 ;  that  is,  he  contracts  a  loan  at  five  per  cent 
when  he  would  be  willing  to  pay  ten  per  cent.  This 
loan,  by  faicreasing  his  present  income  and  decreasing  his 
future,  tends  to  reduce  his  rate  of  impattoice  hom  ten 
per  cent  to,  say,  eight  per  cent.   Under  these  circum- 
stances he  will  borrow  another  $100,  being  now  willing  to 
pay  eight  per  cent,  but  actually  paying  only  five  per 
cent.  This  loan  will  still  further  reduce  Us  rate  of  im- 
patiotce.  He  will  continue  to  Ixmaw  untfl  hb  rate  of 


sk.  ii  oKaMMauasm  or  not  sab  of  uiimmi  391 

impatience  has  been  finally  brought  down  to  five  per  cent. 
Then  for  the  last  or  "  marginal "  $100,  his  rate  ci  im- 
patience win  agree  with  the  market  rate  of  interest  As 
in  the  general  theory  of  prices,  this  marginal  rate,  five 
per  cent,  being  once  established,  applies  indifferently  to  all 
his  valuations  of  present  and  future  income.  Every  com- 
parative estimate  of  present  and  future  which  he  actually 
makes  must  be  "marginal,"  i.e.,  relative  to  small  additions 
to  or  subtractions  from  his  present  and  future  income. 

In  like  manner,  if  another  individual,  entering  the  loan 
market  from  the  other  side,  has  at  first  a  rate  of  impatience 
of  two  per  cent,  he  will  become  a  lender  instead  of  a  borrower. 
He  will  hewUling  to  accept$io2  of  next  year's  income  for  $100 
of  this  year's  income,  but  in  the  market  he  is  <Me,  instead  of 
tte  $103,  to  get  $105.  As  he  can  leai.  at  five  per  cent  wAuia 
he  would  gladly  do  so  at  two  percent,  he  jumps  at  the 
chance  to  get  five  per  cent  and  invests,  not  one  $100 
only,  but  another  and  another.  His  present  income,  be- 
ing reduced  by  the  process,  is  now  more  highly  esteemed 
than  before,  and  his  future  income,  being  increased,  is  less 
highly  esteemed.  The  result  will  be  a  higher  relative 
valuation  of  the  present,  i.e.,  a  higher  rate  of  impatience, 
wbich,  under  the  influence  <^  succesdve  additkms  to  the 
siuns  lent,  will  rise  i^adnalty  to  the  levd  oi  the  madcet 
rate  of  interest. 

In  such  an  ideal  ban  market,  therefore,  where  every  in- 
dividaal  could  fredy  bwrow  or  lend,  the  ratal  oi  impatimre 
for  all  the  different  individuals  will  beooice  tcpul  to  eadl 
other  and  to  the  rate  of  interest. 

To  illustrate  these  principles  by  diagrams,  let  us  suppose 
a  man  lun  a  given  iaocMne-atream,  as  indicated  k  Figure  44. 
It  is  assumed  that  his  income-stream  is  an  ascending  one, 
as  between  one  year  and  the  next ;  that  is,  that  the  in- 
come for  the  year  1910  is  relatively  small  and  that  for 
X9ZX  is  relatively  lasfe.  It  may  be  that  in  19x0  he  is 
ffl.  and  thenlon  does  not  earn  Us  nsnal  aaaomfe  el 


^l!!?***  ^  ^«  «P«=t8  to  get  an  unusual 

inotmie  fcwn  loine  particular  sourw    This  man  wiU  then 

probably  be  im- 
patient to  get 


700 

600 

soo 

(- 

h 

f4- 

•'iOS  RenjrriMl. 

— 

aoo 
•oo 

0 

he  anticipates. 
He  does  not  wish 
to  wait  till  next 
year  if  he  can 
avoid  waiting. 
£D»impatiencei8 
due  to  a  scarcity 


,  aue  10  a  scarati 

g  &ioc»ne  this  year  and  an  abundance  of  income  next  year. 
He  will  wish  to  adjust  his  income  or  rectify  the  disparity  by 
increasing  this  year's  income  at  the  expense  of  next  year's  in- 
come.  He  WiU  borrow,  but  borrowing  changes  the  distribu- 
te in  tune  of  his  income-stream.   His  m^ina/ income  in 
the  first  year  is  I300,  mdicated  by  the  dark  Une  for  the 
year  1910    Next  year  his  income  is  $600,  indicated  by  the 
dark  Ime  for  that  year.    The  effect  of  borrowing  will  be 
to  elevate  the  first  line  by  $100  and  to  depress  the  second 
by  »ios.    These  two  adjustments  wifl  lessen  both  the 
scarcity  of  this  year's  income  and  the  abundance  of  next 
year  s  mwme.  This  will  therefore  modify  the  distribution 
to  time  of  his  income  and  lessen  the  valuation  he  puts  on 
a  dollar  this  y«u:  «i  compared  with  next  year.   This  re- 
duces  the  premium  he  puts  on  this  year's  dollar,  U,  his 
rate  of  impatience.  By  increasing  his  loan  he  can  evidently 
reduce  tUs  premwm  to  conform  to  the  rate  of  interest. 
He  can  also  make  other  loan  contracts,  or  plan  to  make 
them  later,  by  which  he  can  increase  or  decrease  any 
year  s  mcome  at  the  expense  of  an  opposite  change  in  that 
of  K^e  oth«  year  or  years.   In  this  way  he  can  alter  the 
distribution  in  time  of  his  income^tream  at  wiU,  and  he 
wiU  always  so  alter  it  as  to  make  his  rate  of  impatieiice 
equal  to  the  rate  of  interest  He  began  with  a  rate  of 


Sk.i1 


ov  m  BAR  ov  SRsnsT  393 


impatience  greater  than  tlw  maiket  rate  of  hiterast,  but 
outod  in  hanmrny  with  that  rate. 

Figure  45  represents  the  income-stream  of  a  man  sup- 
posed to  have  a  rate  of  impatience  at  first  less  than  the 
rate  oi  interest  If  we  dioote,  we  may  suppose  he 
has  just  received  a  small  legacy  wbkHx  makes  this  year's 
available  income  unusually  large,  say  |6oo,  while  he  expects 
next  year  to  have  an  unusually  small  income.  Looking  for- 
ward to  next  year,  he  sees  that  it  wiU  be  hard  to  get  akmg 
comfortably,  while  this  year  he  has  more  than  he  needs. 
He  therefore  invests  some  of  his  present  abundance  to  the 
extent  of  $100  in  order  to  eke  out  his  future  scarcity  by  $105. 
He  will  do  so,  however,  only  provided  hb  rate  (rf  impatieaoe 
is  less  than  the  maritrt  rate  of  intoest,  five  per  ceiU,  and 
he  will  do  so  only 
up  to  the  point 


• 

TOO 


400 

900- 


-Vioshsturntd 


i 


Wm.  4» 


wU^  Will  bring 
up  his  rate  of  un-      *»!  I  I 
patience  to  the 
level  of  this  rate 
of  mterest. 

The  two  men 
started  out  with 
rates  of  im- 
patience Afferent  fnm  the  mariket  rate  oi  interest  The 
maAet  rate  was  five  per  cent,  while  the  first  man  had  a  rate 
of  impatience  above  this,  and  the  second  a  rate  of  impatience 
below  this.  But  when  they  finished  their  loan  operations  or 
readji^ments  of  the  dlit^flbiititm  in  time  ci  tbeir  faicome- 
streams,  they  brought  their  rates  of  impatience  each  into 
harmony  with  the  rate  of  interest  and  therefore  with  each 
other.  Therefore,  as  long  as  there  is  a  market  in  which 
everybody  can  borrow  or  lend  at  wfll  at  five  per  ooit, 
everybody  will  have  at  the  marg^  a  rate  of  impatieaos 
of  five  per  cent.  Nobody  will  have  a  rate  of  impatience 
above  five  per  cent,  because,  if  it  is  at  first  above  it,  lie 


394     ELEMENTARY  PMNOPLES  OT  ECONOMICS  (Chaf.  XXH 

wm  borrow  enough  to  bring  it  down  to  the  market  rate- 

SL  oY^t         '""^  to  bring  it  up  to  the 

Even  men  of  widely  diflFerent  natuics  as  to  foresight, 
^control  etc.,  wiU  have  the  same  marginal  rates  of  te- 
patience.  U  such  different  men  start  with  precisely  the 
same  sorts  of  mcome,  they  wiB  have  different  rates  of  im- 
pauence.  But  m  that  case  they  will  not  continue  to  have 
the  same  sorts  of  income.  They  will  severaUy  modify 
^ZT'Tu^^  ^^8^^^^  °f  impatience  are 

^^Z^^  '"^^    ^^^'^t  degrees 

of  impatience,  different  sorts  of  income-streams. 

S  a.  Equalizing  Marginal  Rates  of  Imitatitaca  bj 
Spending  and  Investing 

iJ^"^^  °f  borrowers  and 

Mers  correspond  xespectii^  w^^ 

Personal  and  natural  idiosyncrasies,  early  Suing, 
and  acqmred  habits,  accustomed  style  of  Uving,  the  uZS 

fi^JT"^'  ^""^  ^'^'^  circumstances  will,  Ky  influen^ 
to^t,  self-control,  regard  for  posterity,  etc.,  detent 
^er  a  ma^'i^^gKCJiUfflllftfenc^ 

J^^?-^ecpmesai2i  i^^  ' 

It  rfiMd  l^Doted  that  borrowing^Jfindiiu^aiSLJjQt 

mg  and ^Ihng  property;  fa,  jmt^S^j^J^ 
3;^^^^^-.55«5mj9Lanoth^^ 

of  mocGfymg  one's  income-streaiiir^S^EerWe  shall  oOI  tfae 
T^^i^Z'  reaUy  mcludg  thejneth^  of  loan;  for 
^^^i^^  artottom  asale;  that  is,inrth;  ex- 
CMnge  of  the  light  to  pmeat  or  hnmediately  ensuing  in- 


sk.  sI  DBinimiAxniM  or  the  saix  or  inhibst  395 

come  for  the  right  to  more  remote  or  future  income.  A 
borrower  is  a  seller  of  a  note  of  wUdi  the  koder  is  the  buyer. 
A  bondholder  is  regarded  incfifferentty  at  a  tender  and  as  a 

buyer  of  the  bond. 

The  concept  of  a  loan  may  therefore  now  be  dispensed 
with  by  being  merged  in  that  of  sale.  At  bottom  every 
"loan"  is  a  sale.  Thus  when  a  bank  "lends"  to  a 
customer,  it  really  buys  that  customer's  note,  buys 
(for  present  cash)  the  right  to  receive  a  sum  of  money  in 
the  future.  In  the  same  example  the  customer  m  "  bor* 
rower  "  is  really  a  seller  of  future  income  for  present  cash; 
he  sells  his  note  which  is  a  promise  of  a  future  payment. 
In  short,  every  so-called  "  loan  "  is  merely  an  exchange  of 
present  nu»ey  f<Hr  future  nxmey.  These  two  num^s  are, 
of  course,  not  the  same;  so  that  only  by  a  fiction  is  the 
original  money  "  lent "  and  afterward  "  returned."  The 
original  money  is  not  actually  lent  but  absolutely  trans- 
ferred, never  to  be  actually  rettaned,  but  dmpfy  to  be 
replaced  by  other  money. 

By  seUing  sgnLftprnpfrty  righfg  anr^  biiyix-r:!!hfnitji. 

al^j^yTpOSaOBe  to|toftT>j^fn"rm  InnA>a  inr«tnA-.^f,yfln^  fltja'11. 
whethqr  thi>  tr»n^fnrmu^rfw,..4iK^f^iyf^^  ^:cf^>1,tjnn 
ia  famejt  in  respect  tricertainty^-  Thus,  if  a  man  buys 
an  OTchardThe  is  providing^ Wmself  with  future  income 
in  the  use  of  apples.  If,  instead,  he  buys  apples,  he  is 
(Hoviding  himself  with  similar  but  OKne  immedb^  iroome. 
If  he  buys  "securities,"  he  is  providing  himself  witb 
future  money,  convertible  when  received  into  final  or 
enjoyable  income.  If  his  security  is  a  share  in  a  mine,  his 
income-stream  is  less  lasting,  though  it  may  be  larger,  ^ 
than  if  the  security  is  stock  in  a  railway,  -  ''"''X^P 
Purdiasin£jhe  right  to  remote  en|g\^able  income  is  called 
it^esHhg;  purchasing  the  riidit  to  imm«^iflf«>  enjovablc 
incftm«r?raiiPri  cftfHBBpf^  ttu>  flutfthfft^  frftmm  "  tipfmf- 
mg^  and  "investing"  rests  upon  the  antithesis  betweoi 
immediate  and  semote  income.  The  adjustment  betwam 


the  two  diAennines  the  distiftution  in  time  of  om'b  in- 

comii-strenTn.  Spending  increases  immediate  income,  but 
robs  the  futtire,  whereas  investing  provides  for  the  future 
to  the  detriment  of  the  present. 

From  what  has  been  said  it  is  clear  that  by  buying  and 
selling  property  an  individual  may  change  the  conformation 
of  his  income-stream  precisely  as  though  he  were  specifically 
lending  or  borrowing.  Thus,  if  a  man's  originad  income- 
stream  consists  of  $1000  this  year  and  $1500  next  year, 
and  if,  selling  this  income-stream,  he  bu3rs  with  the  proceeds 
another  income-stream  yielding  $1100  this  year  and  $1395 
next  year,  he  has  not,  nominally,  borrowed  $100  and  repaid 
$105,  but  he  has  dont  what  amounts  to  the  same  thing — 
increased  his  income-stream  of  this  year  by  $100  and 
decreased  that  of  next  year  by  $105,  the  $100  being  the 
modi&ation  produced  in  his  income  for  the  first  year  by 
selling  his  original  income-stream  and  substituting  the 
second  one,  and  $105  being  the  revene  in 
next  year's  income. 

§  3-  Vvmf  of  RraUUtinc  IntMMt 

We  may  now  note  that  interest  taking  cannot  be  pre- 
vented by  prohibiting  loan  contracts.  To  forbid  the  par- 
ticular form  of  sale,  called  a  loan  amtiact,  would  leave 
possible  other  forms  of  sale,  and,  as  has  been  shown,  the 
valuation  of  every  property  right  involves  interest.  If  the 
prohibition  should  leave  individuals  free  to  deal  in  bonds, 
it  is  clear  that  virtually  th^  would  be  still  b<»rowing  and 
lending,  but  under  the  name  of  "  sale  " ;  and  if  "  bonds  "  were 
tabooed,  they  could  merely  make  the  slight  change  to  "pre- 
ferred stodc."  It  can  scarcely  be  supposed  that  any  pro- 
hibition of  interest-taking  would  extend  to  the  prohibition 
cf  aU  buying  and  selling;  but  as  long  as  buying  and 
selling  of  any  kind  were  permitted,  the  virtual  effect  of 
lending  and  bestowing  would  be  retained.  The  possessor 


Sic  3]   OSTESMXNAXION  Of  IBB  SATE  OF  DfTSKXST  397 


of  a  forest  of  young  trees,  not  being  able  to  mortgage  thdr 
future  return,  and  being  in  need  of  an  income-stream  of  a  less 
deferred  type  than  that  receivable  from  the  forest  itself, 
would  sbqtly  sdl  his  forest,  and  with  the  proceeds  buy, 
■ay,  a  farm  with  a  vmiform  flow  of  income,  or  a  mme  witii 
a  decreasing  one.  On  the  other  hand,  the  possessor  of  a 
capital  which  is  dq>reciating,  that  is,  which  represents  an 
facome-stream  great  now  but  steadily  dedining,  and  who 
is  anxious  to  "  save  "  instead  of  "  qpcnd,"  woidd  leU  hb 
depredating  wealth  and  invest  the  proceeds  in  some  such 
instrument  as  the  forest  already  mentioned. 

It  was  in  such  ways,  as,  for  instance,  by  "  rent-purchase," 
that  the  medieval  prohibitions  of  usury  were  rendered 
nugatory.  Practically,  at  the  worst,  the  effect  of  restrictive 
laws  is  simply  to  hamper  and  make  difficult  the  finer 
adjustments  of  the  income-stream,  compelling  would-be 
borrowers  to  sell  wealth  yielding  distant  returns  instead  of 
mortgaging  it,  and  woiUd-be  lenders  to  buy  the  samo,  Instead 
of  lending  to  the  present  owners.  It  is  conceivable  that 
**  exp&dt "  interest  mi^t  disappear  under  sudi  restrictiocis, 
but "  inq)lidt "  interest  would  remain.  The  young  forest  sold 
for  $10,000  would  bear  this  price,  as  now,  because  it  would  be 
the  discounted  value  of  the  estimated  future  income ;  and 
the  price  of  the  farm  bought  for  $10,000  would  be  determined 
in  like  manner.  The  rate  ai  discount  in  the  two  cases  must 
tend  to  be  the  same,  because,  by  buying  and  selling,  the 
various  parties  in  the  conununity  would  adjust  their  rates  of 
impatioice  to  a  onnmon  level  —  an  implidt  rate  of  interest 
thus  lurking  in  every  contract,  though  pgvi|»r  gp«>rifiranv  «p. 
peanng  therein^  Interest  is  too  omnipresent  a  phenomenon 
tdbeeraSIcated  by  attacking  any  particular  form ;  nor  would 
any  one  undertake  it  who  pemived  the  substance  as  well  as 
the  i<xm.  _^In_s\ibstanicejJ^e  rate  of  interest  represents  the 
terms  on  which  the  earlier  and^Tater  elements  of  income- 
'l!^!"*^'"  '^^'^'^gftfl^^^  against  ray^  ^t^er.    TntTrpat  ran_ 

never  disappear  until  ures^nt  '^"^  fiitiirfiHnllais|  will  <>Tr^y<»^gy 


I 


398     ELBHIIfTAXY  niNCIPLBS  OJ  KONOIOCS   JCmap.  XXII 

Jiar.   This  would  imply  that  human  beings  were  no  longer 
impatient,  but  considered  it  no  hardship  to  wait  indefinitely. 

We  have  hitherto  supposed,  for  simplicity,  that  the  in- 
come from  each  instrument  is  fixed  in  size  and  distributkm 
in  time.  But  often  the  same  article  may  be  used  in  any 
one  of  several  ways  producing  any  one  of  several  different 
income-streams.  In  such  a  case  the  owner  merely  chooses 
the  particular  way  which  gives  the  capital  the  hig^t  value. 
Since  any  man's,  jnc^^  may  be^  transformed  as  to  its  dis- 
tnbufibn  in  time  by  thejj^ess^f^ 
or  buying  and  selling,"  He  need  not  be  deterred  from  elect- 
ing an  income  by  an  inconvenient  distribution  in  fiSne.  ^l^ 
can  choose  it  exclusively  on  the  basis  of  maximum  prwent 
value  and  later  correct  any  inconvenience  of  its  distiih\itiQp 
in  time  by  borrowing  and  loijStg^OT^ying  ^Hjng 

§  4.  GleuiBff  the  Umn  Mntet     j-h  <*?yr<VfWM^ 

We  have  seen  that  from  the  standpoint  of  the  inoividuat^ 
when  a  rate  of  mterest  is  given,  he  will  adjust  his  rate  of 

impatience  to  correspond  with  that  rate  of  interest. 

For  him  the  rate  of  interest  is  a  relatively  fixed  fact, 
since  his  own  rate  of  impatience  and  resulting  action  can 
affect  it  only  infinitesunally.  All  he  can  do  is  to  adjmt  his 
rate  of  impatience  to  the  rate  of  interest  as  he  finds  it  For 
society  as  a  whole,  however,  these  rates  of  impatience  deter- 
mine the  rate  of  interest.  This  corresponds  to  what  was 
said  as  to  the  determination  of  jMrices.  We  have  seec  that 
each  individual  regards  the  market  price,  say,  of  coal,  as 
fixed,  and  adjusts  his  marginal  desirability  or  undesirability 
to  it;  whereas,  for  the  entire  market,  we  know  that  these 
marginal  dedrabOities  and  undesirabilities  fix  the  price  of  coal. 
In  the  same  way,  while  for  the  individual  the  rate  of  interest 
determines  the  rate  of  impatience,  for  society  the  rates  of 
hnpatience  of  tne  individuals  determine  the  rate  of  interest. 
The  iBte  of  ktexest  k         the  nUe  of  fe»imttiMMf  19011 


Sk.4]   OXIXSMINAnON  Of  IHB  MATE  Of  2MIIUC8T  399 


iHikh  the  wbelk  community  may  concur  in  order  that  the 
market  of  loans  may  be  exadfy  deand.  Sfxpffy  and  d»* 
mand  will  work  this  o\it 

To  put  the  matter  in  figures :  if  the  rate  of  interest  is  set 
very  h^  say  twenty  per  cent,  there  will  be  relatively  few 
borrowers  and  many  would-be  lenders,  so  that  the  total 
extent  to  which  would-be  lenders  are  willing  to  reduce  their 
income-streams  for  the  present  year  for  the  sake  of  a  much 
larger  future  income  vdll  be,  say,  $100,000,000;  n^iereas, 
those  who  are  willing  to  add  to  their  present  income  at  the 
high  price  of  twenty  per  cent  interest  will  borrow  only,  say, 
$1,000,000.  Under  such  conditions  the  demand  for  loans 
is  far  diort  of  the  stqpfdy,  and  the  rate  of  intoest  wOl  thoe- 
fore  go  down.  At  an  interest  rate  of  ten  per  cent,  the  present 
year's  income  offered  as  loans  might  be  $50,000,000,  and  the 
amount  which  would  be  taken  at  that  rate  only  $20,000,000. 
There  Is  still  an  excess  of  supply  otvct  demand,  and  interest 
must  needs  fall  further.  At  five  per  cent  we  may  suppose 
the  market  cleared,  borrowers  and  lenders  being  willing  to 
take  or  give,  respectively,  $30,000,000.  In  like  manner  it 
can  be  shown  that  the  rate  would  not  fall  bdow  thk,  as  W 
that  case  it  woiild  result  in  an  excess  of  demand  over  wof^^, 
and  cause  the  rate  to  rise  again. 

HfflSL A«-rate  of  interest  is  the  common  market  rate  of 


in^Nitience  ina>me,  as  determined  by  the  supply  and 
Tieifiandjof  pri»mt  an5  future  ijro  Those  who  are 
very  irhpafient  strive  to  acquire  more  present  income  at 
ihc  cost  of  future  income,  and  tend  to  raise  the  rate  of 
interest.  These^are  the  borrowers,  the  spenders,  the  fruyt^ 
of  goods  which  ja^^^^  sellers 
of  property  yielding  remote  income,  such  as  bonds  and 
stocks.  Cto.  the  otba  hand,  those  who  —  bemg  relatively 
patient  — •  strive  to  acquire  more  future  tnoooae  1^  the 
Goat  of  present  income,  tend  to  lower  the  rate  of  interest  , 
These  are  the  lenders,  the  savers,  the  investors,  cr  buyers  <^ 
Tbe  merhanign  just  described  will  not  only  result  in  a  5e4uri1\ 


400     ELEMENTASY  PBIKCIPLES  Of  XCONQIflCS    (Qur.  XXU 


rate  which  will  clear  the  market  for  loans  connecting  thft 
present  with  next  year,  but,  applied  to  exchanges  between 
the  present  and  the  remoter  future,  it  will  «*»Mr  dmiUi. 
adjustments.  While  some  indMdtttb  may  wish  to  a- 
change  this  year's  mcome  for  next  year's,  others  wish  to 
exchange  this  year's  income  for  that  of  the  year  after  next, 
«  for  income  several  years  in  the  future.  The  rates  of 
interest  for  these  various  periods  are  so  adjusted  as  to  dear  \ 
the  market  for  all  the  poiods  of  time  for  which  contracts  ttt^,\ 
IMt  is,  supply  anddemaad  must  be  egu^  so 
to  d»r  themaAei  lot  every  period  of  time.  | 

Is.  The  Cooditioiia  Dt(HBinii«  tha  igj^'^^'^i^^^''^^"'*' 


We  have  sketched  the  main  principles  determining  the  rate  I 
of  mterest.  Some  have  not  been  mentioned  save  by  im-  ^  J  . 

plication.  In  summary  we  may  say  that  the  rate  of  inter-  '^^^ 
est,  considered  independently  of  fluctuations  in  the  monetary  / 
standard,  is  determined  by  six  conditions.  Those  which  we 
have  above  considered  and  explained  are  the  foBowing  three :     h\\  f 
(i)  the  dependence  of  impatience  upon  prospective  income  —  \o 
its  size,  distribution  in  time,  and  uncertainties;  (2)  the     ^'"^  c 
tendency  of  the  rates  of  impatience  for  different  individ- 
uais  to  seek  a  common  level  in  the  resulting  rate  of        < ' 
interest;  (3)  the  fact  that  supply  and  demand  must  be 
equal  so  that  the  modifications  in  the  income-streams  of 
individuals,  through  buying  and  selling,  or  borrowing  and       ^  .rf 
lendmg,  must  "  dear  the  market."  p- ■ 

Of  the  remaining  three  determining  conditions  the    o.^;  ^ 
important  may  be  stated  in  the  following  form :  (4)  of  ail  ^ 
*^^^°«L|»«  to  whidi  a  man  may  put  his  capitafh*/  > 
^  choose  that  one  whidi  >t  tl^ir;;^^  ^^jtTMttt^ 
nmkes  the  present  value  ol lu&japital  the  larg^ytfiM^le.) 
^us  a  farmer  may  have  the  option  of  using  a  certain  j 
pece  of  land  as  wheatland  or  as  woodland.    If  he  uses  i 
it  as  iriieatlaiid,  he  cancan  income  iiom  it  every  year;  ^ 


but  if  he  plants  a  young  forest  on  it,  he  must  wait  per* 
bi^M  a  generation  before  receiving  any  return.  To 
oompaie  the  relative  meriu  of  theie  two  oMtef  the  bnd, 

he  wUl  need  to  calculate,  as  well  as  he  can,  the  total 
present  values  of  the  incomes  he  would  get  in  the  two 
ways.    If  he  reckons  that  the  present  value  of  the  lixtxat 
income  he  can  get  by  growing  wheat  is  about  $13,000,  but 
that  the  present  value  of  the  future  income  he  can  get  by 
growing  timber  is  $10,000,  he  will  prefer  to  grow  wheat. 
Evidently  these  calcalationi  of  present  value  can  be  made 
only  by  employiof  ft  late  of  interest,  aad,  if  the  rate  of 
interest  falls,  tiie  comparison  may  be  reversed;  timber- 
growing  might  then  become  more  profitable  than  wheat- 
growing.    Thus  tho  fanner's  decision  as  to  which  of  the 
optkmal  iiset  of  his  capital  is  the  best  will  dcf»cnd,  in 
part,  on  the  rate  of  interest.    Reciprocally  the  rate  of 
interest  in  the  community  will  dqymd  in  part  on  the 
dioloe  of  taes  of  capital.   Thus,  if  a  fall  in  the  rate  of 
interest  leads  many  people  to  abandon  wheat-growfaig  ifr 
order  to  take  up  the  timber  business,  this  shifting  of  part 
of  the  income  of  the  community  from  the  immediate  to 
the  remote  futtne  will  tend  to  check  the  fall  in  the  rate 
of  interest  on  the  principle  ahready  ^-^piwhfd — that  an 
increase  of  a  remotely  future  income  increases  himian  im- 
patience.   To  be  more  specific,  if  a  fall  in  the  rate  of  \ 
interest  makes  timber-growing  pay,  where  before  it  was  \ 
unprofitaUe  as  compared  to  ^eat  productkm,  then  mmy 
of  the  farmers  who  turn  to  timber  will  need  to  borrow  1 
money  while  they  are  waiting  for  their  slow-growing  j 
crop.   Thr"  will  therefore  add  to  the  demand  for  kwns, 
and  tend  t.  raise  the  rate  of  interest.    Thus  we  sef  t^^t  . 
the  rhoiVft  bgtwftf"  HiffAr.mt         ^<  ..op.-fal  \yoV 

influence*  ^fi^Ai-mininy         i^t^  i^*^^* 

Theranaioing  two  oonditicms  are  very  obvious  ones ;  one 
condition  being  that  (5)  what  is  borrowed  at  any  tiaie  bj 
some  peneos  equals  what  is  kMoed  at  that  time  oHhn 


4M    XUUOMTAKY  P&IMCIPLBt  OV  »^v*-nint'i    |Cm^  XXB 


I 


"it 


penoat,  aad       other  eewitiMi  ttdng  that  (6)  what  any 
person  borrows  at  one  timr  must  bi    paid  by  diat  pitm 
at  another  time  wifh  interest  at  th*  market  ra*e. 
/    'n^wejjt^t-onditiona  would  fuJl^  Uetermine  the   x  ,f 
inteiwrmiaer      aasunqitli^  we  have  made  of  ;  pcriect 
loan  market     But  k  practice  these  conditions  are  aome- 
what  modiiici     For  instance,  the  la  t  or    -th  r  nr  u'o 
(that  the  loan  is  L  be  repaid)  b  not  always  actually  met 
and  the  fear  that  it  may  not  be  met  affects  i  iC  rate  U 
interest    nd  often  decides  whether  at    he  o  .i^^  a  tear? 
shall  be  made  or  not.    Sor  >  sort  of  .  oirity  i  equj 
fer  ahnost  every  Joan.    Here,  as  in  otli  -  insta.  ces,  ui* 
•i^SSJL^yii  "  Intertwined  witli  ine  ra    of  intex.  ■ 

Apmr  tKirsecond  condition  (that  the  degreef  of  ii^ 
tience  of  all  persons  become  eqi  il  '  i  e  oi  _  M?«it) 
^ay  not  be  fully  met;  for  a  w<  Id-bc  htn  uwer  ^  *r 
be  aUe  (owing  to  lack  of  aaciirit)  satWactt^  to  tl  ^aia) 
to  secure  a  laige  enough  lo«i  to  educe  aa  ja^  mm  to 
equality  ^  tb  ■  market  ra^-  of  int.  re  ,  >  >  ^^.^y  be 
aSected  by  Uws  restricting  ioans.  ^  aose  thu  shut  out 
of  tht  loan  market  wil  coitiKie  to  *ve  m  imi 
income  higher  than  the  mxrk^A  -ate  ia^^ 

Again,  the  fourth   >nditi     (  lat  the  u 
Ul  chosen  will  W  th  »t  use  of  which  the 
greater  than  ^  pre  ^  vahw  <rf  any 
always jpet.  .        b.  msp  the  o.       is  « 
forecasts  or  bee  ^  ae  r    na  bic  to  ob  on  a  i. 
finance  las  ch(»  .  cer  in  lam 

most  as  tfaabe^^  ^xi     t  seter  v  mt- 
cause  the  ov      c.  in.      m^^'de     •  loar 
the  lean  years  rtiiich  mL  1'- 
^^^result  o  '  these  anu     ^r  impt  r. 
market  is  that  there  are  reall>  many 


ience  fen- 


es  ,pi- 
r  vaiue  is 
i^tr  is  not 
t£^en_fa_h^ 
i  by  whi^tp 
may  be  worth 
grazing  land,  be- 
or  otherwise  for 
!S  growing, 
in  the  loan 
i-es  oTTinieiesF 


1 


mcti^ad  of  one  only  One  rate,  or  rather  group  of 
rates  of  mtere<^t,  ,  that  realized  on  bonds;  another  is  that 
-*  in  short-tkM  L  mk  loans;  a  third,  that  in  "call" 


by 


Sac  d  BmaKAnoN  m  mt  mjob  or  ntumi  403 

loans.    Perhaps  the  most  representative  rate  of  interest  is 
ae  rate  on  two  or  three  months'  loans  at  ban^s  on  indorsed 
notes  of  merchaatt  called  '*  oooimerdal  peper." 

AnotheiLiesult  of  .thfiJapeiicctioDa J2f  the  laaa  mad^et 
i.s  that  the  minor  fluctuations  in  any  particular  rate  ol  ia^ 
terest  are  more  often  due  to  varying  imperfections  of  the 
market  i^fuitmient  than  to  variations  of  iaoome,  human 
impatience,  and  the  other  factors  enumerated  as  the  fuj  - 
damental  conditions  deter,,  ining  thi  rate  of  in  threat-  For 
instance  the  rate  of  ini  est  on  bank  loans  varies  from 
time  to  tuoe  with  the  duaga  ki  the  ratb  of  leaenras  to 
deposits  specially  if  there  be  i  legal  requirement  as  to 
this  ratio.  A  bank  may  refuse  a  loan  to  avoid  increasing 
its  deposits  (in  relation  to  reserves)  above  the  legal  ratio 
or,  before  thb  btcauwi  mrrmmy,  it  raiie  its  rate 
in  an  icipation.  Thus  the  Bank  of  Eng^d  raises  its 
rate  w.ien  necessary  to  "protect"  it  reserve.  The  daily 
variations  in  bank  rates  are  usually  uue  more  to  the  need 
of  rtaAijaOag  the  ratio  of  remves  to  depoaiti  than  to 
chai!      in  its  customers'  impatience  or  in  their  incomes. 

B  the  long^  run  the  rate  of  interest  is  a^Jait^ 
faithi  itp:r  at  hiim..ji  impatifflCT'  as  modified  by 
mutofe  and  borrowings  in  Gonformity  with  the  six 
omditioi  ...entbned.  While  the  surface  causes  men- 
tioned in  the  preceding  paragraph  are  necessary  to  explain 
slight  local  variations  of  interest  as  between  New  York 
and  Boston,  or  to  eq^ain  sHg^t  daily  or  monthly  dianges 
of  interest  rates  by  a  fraction  of  one  per  cent,  the  differ- 
ences in  human  impatience  in  incomes  and  in  price  move- 
ments are  the  underlying  influences  which  explain  why  the 
rates  in  America  or  Qdna  are  several  per  cent  h^jimr  than 
in  England  or  Holland,  and  why  the  rates  in  one  'v  tst 
history  are  two  or  three  times  as  high  as  in  ^ 
epoch.  Idl  shgrt,^  interest  rates,  iffe  l^ 
l^ycl  of  iMch  fa  sHrittly  ap^  t*mp<y^dbLi 
i^ds,.biit  moie  fundamcatall^Jiy  ^nat  Hiai 


404  BLnomxAxy  nmcnuts  09  looMoiiia  fcuv-xxii 


S  6.  Historical  nittstntions 

We  have  now  completed  our  study  of  the  causes  deter- 
mining the  rateof  interest.  If  they  are  correct,  we  shouldfind 
that  the  rate  of  interest  is  low  (i)  if  in  general  the  people  are 
by  nature  thrifty,  farsighted,  self-omtroitod,  or  tfaoogfat- 
ful  for  the  future  welfare  of  their  children,  or  (a)  if  they  have 
large  or  descending  income-streams ;  and  that  it  is  high  (i) 
if  the  people  are  shiftless,  shortsighted,  impulsive,  selfish, 
or  (2)  if  they  have  small  or  aicoiding  income-ttrauiis. 

History  shov,rs  that  facts  accord  with  these  conclusions. 
The  communities  and  nationalities  which  are  most  noted 
for  the  qualities  mentioned  —  foresight,  self-control,  and 
regard  for  posterity  —  are  prohMy  Holland,  Scotlaiid, 
England,  and  France.  Among  these  people  interest  has  been 
low.  Moreover,  they  have  been  money  lenders ;  they  have 
tlie  habit  of  thrift  accumulation,  and  their  instruments 
of  wealth  are  in  general  of  a  duraUe  Hw^. 

On  the  other  hand,  among  communities  and  peoples  noted 
for  lack  of  foresight  and  for  negligence  with  respect  to  the 
future  are  China,  India,  Java,  the  negro  communities  in 
tiie  Southern  states,  the  peasant  communitiet  of 
and  the  North  and  South  American  Indians,  both  before 
and  after  they  had  been  pushed  to  the  wall  by  the  white 
vam.  b  all  of  these  communities  we  find  that  interest  is 
lugh,  that  there  is  a  tenden^  to  run  into  ddbt  and  to  ^ 
sipate  rather  than  accimiulate  capital,  and  that  their  dwell- 
ings and  other  instruments  are  of  a  very  flimsy  and  perishable 
diaracter,  built  for  immediate,  not  remote,  gratifications. 
This  is  true  even  where,  as  in  Gdna,  the  people  an 
industrious.  Industry  without  patience  will  result  in  hard 
work,  but  this  work  will  be  for  immediate  and  not  remote 
ffratttcattoBs. 

These  examples  illustrate  ^  dktt  on  tiM  rate  of  »• 
terest  of  differences  in  human  nature.  We  now  turn  to 
illustrations  of  differences  in  the  dtttribution  bx  tiaw  cl 


Sk.6)  dbtbuonation  ov  TBI  lAXK  OF  ramm  405 


incomes.  The  most  striking  examples  of  increasing  income- 
streams  are  found  in  new  countries.  It  may  be  said  that  the 
United  States  has  almost  atway&  belonged  to  tUs  a^^ry. 

In  America  we  see  exemplified  on  a  very  laige  scak  tlie 
truth  of  the  theory  that  a  rising  income-stream  raises,  and 
a  falling  income-stream  depresses,  the  rate  of  interest,  or 
that  these  confOTmatlons  of  the  income-stream  work  out 
their  effects  in  other  eqvdvalent  forms.  A  similar  causation 
may  be  seen  in  particular  localities  in  the  United  States, 
especially  where  changes  have  been  rapid,  as  in  mining 
communities.  In  Califomia,  in  the  two  decades  between 
1850  and  1870,  following  the  discovery  oi  gold,  the  inanKS 
stream  of  that  state  was  increasing  at  a  prodigious  rate. 
During  this  period  the  rates  of  interest  were  abnormally 
h^.  The  current  rates  in  the  "  early  days  "  were  quoted 
at  one  and  one  half  to  two  per  cent  a  month.  "  The  thdfty 
Michael  Reese  is  said  to  have  half  repented  of  a  generous 
gift  to  the  University  of  California,  with  the  exclamation, 
*Ah,  bat  I  lose  the  interest,'  a  very  natural  regret  when  in- 
terest was  twenty-four  per  cent  per  annum."  After  raihray 
connection  in  1869,  Eastern  loans  began  to  flow  in.  The 
decade  1870-1880  was  one  of  trandtion  during  which  the 
fAewnwDonof  h^  interest  was  gradually  replaced  by^ 
phenomemn  of  borrowing  from  outside.  The  residents  <rf 
Califomia  were  thus  able  to  change  the  distribution  in  time 
of  their  income-streams.  The  rate  of  interest  consequently 
dropped  bcm  eleven  per  cent  to  six  per  cent 

The  same  phenomena  of  enormous  interest  rates  wen 
also  exemplified  in  Colorado  and  the  Klondike.  There  were 
many  instances  in  both  these  (daces  during  the  transition 
period  fron  pofverty  to  afflaence,  when  loans  were  omtracted 
at  over  fifty  per  cent  per  annum,  and  the  borrowers  rsgarded 
themselves  as  lucky  to  get  rates  so  "  low."  In  general  the 
pioneer  is  willing  to  pay  a  hi^  rate  of  interest  so  kog  as 

he  choiriM  the  pMl  eaqnclitiBBs  »  chaiacteiiitic  of  new 
countiiet. 


4o6   suEKBifEAiY  noMcipm  OP  xocnioMics  tCsAT.  xxn 


§  7.  Inteieit  and  Pricea 

We  have  seen  that  the  rate  of  interest  is  not  a  mere  tech- 
nical phenomenon,  restricted  to  Wall  Street  and  other 
"  money  markets,"  but  that  it  permeates  all  economic  re- 
latkns.  It  is  the  link  vriddi  Unds  man  to  the  fattire  and 
by  which  he  makes  all  hb  far-reaching  decisions. 

The  rate  of  interest  is  itself  a  sort  of  price  and  plays  a 
central  r61e  in  the  theory  of  other  prices.  It  operates  in 
the  drtermination  erf  the  i»ice  of  wealth,  prq>ert> ,  and  bene- 
fits. It  enters  into  the  price  of  securities,  real  estate,  and 
commodities,  as  weU  as  into  rent,  wages,  and  the  value  of  all 
"  interactions."  As  was  shown  in  previous  chapters,  the 
price  ci  any  artide  of  wealth  or  pn^rty  is  equal  to  the  dis- 
oooated  vdue  of  its  expected  future  benefits.  If  the  value  of 
these  benefits  remains  the  same,  a  rise  or  fall  in  the  rate  of 
interest  will  cause  a  fall  or  rise  respectively  in  the  value  of 
all  instruments  of  wealth.  The  extent  of  this  fall  or  rise 
will  be  the  greater,  the  fartha  into  the  future  the  benefits 
of  wealth  extend. 

As  to  the  influence  of  the  rate  ol  interest  on  the  price  of 
benefits,  we  first  obsorve  that  benefits  may  be  hit  inctkms 
or  satisfactions.  The  value  of  interactions  is  derived  from 
the  succeeding  future  benefits  to  which  they  lead.  For 
instance,  the  value  to  a  farmer  of  the  benefits  of  his  land  in 
affording  pasture  for  sheep  will  depemi  xxptm  the  dkcounted 
value  of  the  benefits  from  the  flock  in  producing  wool.  The 
value  of  the  wool  output  to  the  woolen  manufacturer  is  in 
turn  influenced  by  the  discor  .ced  value  of  the  ou^>ut  of 
WDoten  doth  to  iriiidi  it  omtribtttes.  Litihe  next  sU^,  the 
value  of  the  production  of  woolen  doth  will  depend  upon 
the  discounted  value  of  the  income  f'  the  production  of 
woolen  dothing.  Finally,  the  vali  lie  last  named  will 
dqpoid  vpm  ^  eqwctod  iaooBie  v  ildi  the  dothing  wffi 
bring  to  kt  «MtBn-~in  odwriiwdi,  ^OB  tiw  OM of  tlM 
dotheSi 


Sac  7]  onxumiAiBiir  o»  m  bas  m  nimn  407 


Thus  the  final  benefits,  consisting  of  the  use  of  the  clothes, 
will  have  an  influence  cm  the  value  of  aU  the  aaterinr  benefits 
of  tailoring,  manufacturilng  cloth,  producing  wool,  and 
pasturing  sheep,  while  each  of  these  anterior  benefits,  when 
discounted,  will  give  the  value  of  the  respective  capital 
miadk  yidds  it;  namely,  the  dxMtu,  doth,  wod,  sheep, 
and  pasture.  We  find,  therefore,  that  not  only  aU  artides 
of  wealth,  but  also  all  the  "  interactions  "  which  they  render, 
are  dependent,  for  their  value,  upon  final  enjoyable  uses, 
and  are  finked  to  these  final  uses  by  the  rate  of  interest. 
If  the  rate  of  interest  rises  or  falls,  this  chain  will  shrink  or 
expand.  The  chain  hangs,  so  to  speak,  by  its  final  link  -bf 
enjoyable  benefits,  and  its  shrinkage  or  expansion  will  there- 
f<»e  be  most  Idt  tte  finks  most  cHstaat  horn  ttew  final 
benefits.  At  the  close  of  Chapter  VI  it  was  shown  that  a 
change  in  the  rate  of  interest  only  slightly  affects  the  value  of 
a  suit  of  dothes,  the  benefits  from  which  are  soon  realized, 
but  greatly  affects  tin  vahw  <rf  land,  the  benefits  of  wUdi 
stretch  out  into  the  distant  future.  So  a  change  in  the  rate 
of  interest  will  affect  but  slightly  the  price  of  making  clothing 
since  the  final  benefits  from  making  dothing  will  occur  in  a 
duMTt  time,  Imt  it  iHQ  affect  mslerially  tibepcke  of  pasture 
for  sheep  smce  the  fihal  boMfite  bom  tbe  pattwring  nitt  re- 
quire a  long  time. 

A  study,  therefore,  of  the  theory  of  prices  involves  (i)  a 
study  of  the  him  lAUk  delemdne  the  prices  of  final 
benefits  on  which  the  prices  of  anterior  interactions  de- 
pend; (2)  a  study  of  the  prices  of  these  anterior  mter- 
actions,  as  dependent,  through  the  rate  of  interest,  on  the 
final  benefits;  (3)  a  study  of  tiw  ptioe  of  capital-instiii- 
ments  and  capital-property  as  dependent,  through  the  rate 
of  interest,  upon  the  prices  of  their  benefits.  The  first 
study,  which  seeks  merdy  to  determine  the  laws  regulat- 
ing the  pfka  of  final  benefits,  b  rdativdy  indq}endent 
of  the  rate  of  interest  The  second  and  third,  which 
sedi  to  show  the  drpcndcnce  on  final  benefits  <rf  tbe  anterior 


408    BUUZNXA&Y  PSZNCmiS  OT  BCONQillCS  (CBtf.XXn 


benefits  and  of  the  capitals  tHddi  bear  them,  involve  and 

depend  upon  the  rate  of  interest. 

In  the  theory  of  prices  we  found  that  the  ultimate  elements 
fiq)pBed  and  demanded  were  satisfactions  and  efforts.  But 
we  now  see  that  there  is  involved  in  each  price  amtlker  q)edal 
price,  viz.,  the  rate  of  interest.  Without  the  rate  of  interest 
we  may  only  compare  simtdtaneous  satisfactions  or  efforts. 
WMt  it  we  may  compare  all  that  exist.  By  means  of  the  rate 
(rf  interest  any  future  satisfaction  or  ^ort  is  discounted,  and 
thus  translated  into  terms  of  present  value.  It  enables  u 
to  pause  at  every  step  and  appraise  the  interactions  and  cap- 
ital which  anticipate  future  satisfactions.  In  other  words, 
Iqr  it  we  capitalize  income  and  form  our  capital  accounts. 

Interest,  then,  is  the  universal  time-price,  linking  im- 
pending and  remote  satisfactions,  or  efforts,  or  both.  It  is 
Mterally  the  previously  missing  link  necessary  for  a  complete 
comparison  of  efforts  and  satisfactions  at  all  pofaits  of  tfane. 

The  study  of  the  rate  of  interest,  U^refore,  rounds  oat 
and  completes  our  study  of  prices. 

f  8.  ClMtifieation  of  Mce  Influences 

We  may  now  fitly  review  the  theory  of  prices  by  enumer- 
ating the  various  possible  causes  which  might  decrease  the 
price  let  us  say,  iron  in  New  York.  Itsprice  might 
fall  for  any  om  or  man  fd  iht  foQowing  reaams :  — 

L  A  rise  in  the  marginal  desirability    moHey  dm*  titim  t» 

A.  A  rise  in  the  purchasing  power  of  money  thmngh 

I.  A  decrease  in  money  or  deposit  currency,  or 

3.  A  decrease  in  their  velocities,  or 

3.  An  increase  in  the  volume  of  trade;  «r  lo 

B.  An  inpoveriihmBiit  or  reducti<m  of  incomes. 

n.  A/^imtiu  marpnal  desirability  of  pig  iron  dm  either  to 
A.  An  faioeaie  in  the  amount  of     ircm  used,  throi^ 

t.  Inqwrtation  of  pig  iron  from  other  plaoM  iriHR  to 
price  is  lower  than  in  New  Yoik,  or 


Sk.4  sbixskdiatxon  or  the  rate  of  intebzst  409 


».  Short  sales  of  pig  iron  for  future  delivery  in  ez- 
pecUUkmof  a  fall  of  price,  thus  releasing  to  i»e»- 
oit  QM  ndi  stocks  as  noHld  odMiwiH  ba  hsU 

over  for  the  future,  or 

3.  A  decrease  in  its  cost  by 

a.  A  saving  of  waste, 

b.  A  saving  of  labor, 

c.  A  decrease  in  the  price  <rf  inm  ore  or  odm 

prices  entering  into  its  cost, 

d.  An  increase  in  the  price  <rf  by-products,  or 

4.  A  tiwletnur;  mrt» 

B.  AfallinthemarginaldednUlityof  a  ghrcn  quantity  of  pig 
iron,  through 

I.  A  deacase  in  the  price  of  iron  products  throuf^  a 
decrease  in  the  marginal  dfsirshility  <rf  theNtia* 
factions  they  yield,  because  of 

a.  An  increase  in  their  amount, 

b.  A  diange  in  fashion,  etc,  or 

t.  Ab  incfMie  in  nihatitutaa  for  pig  iroB,  <v 

3.  A  decrease  in  complementary  articles,  or 

4.  An  increase  in  the  rate  of  interest  whcmby  the  value 

of  pig  ircm  is  obtained  (by  discounting  the  value 
of  inm  products)  throuf^  an  \aamm  in  tlM 
marginal  rates  of  hnpatience, 
0.  Wtaoi  a  change  in  human  nature 
(x)  By  decreasing  foresight, 
(a)  ^  decrearing  adtoontnd, 

(3)  By  increa^ng  shiftless  habits, 

(4)  By  decreasing  regard  fw  posterity,  or 
ft.  Fkran  a  change  in  incomes 

(i)  By  shifting  their  disttSmtin  in  tiat 

toward  the  futore. 
(a)  By  redudng  their  size, 
(3)  By  increasing  their  unoertaintieB. 

Back  of  tiMM  causes  lie  other  causes,  multiplying  end- 
lessly as  we  proceed  backward.  But  if  we  trace  back  all 
of  these  causes  to  their  utmost  limits,  they  will  all  resolve 
themselves  hito  diaages  in  the  marginal  derinfagty  or 
undesirability  of  satisfactions  and  of  efforts,  respectively, 
at  different  points  of  time,  and  in  the  marginal  rate  of 
impatience  as  between  any  <ne  year  and  the  next 


CHAPTER 


ofocaiB  waxm  cartal 

§  I.  Diitribution  according  to  Agents  of  Ptoductioii  tad 
MMTding  to  Owners 

We  began  this  book  with  a  study  of  economic  accounting. 
In  ^  way  we  obtabed  a  bird's-eye  view  of  the  whole  field 
of  economic  science.  M  Hut  Hme  we  had  to  take  ready- 
made  the  material  for  constructing  our  capital  and  income 
accounts.  This  material  consisted  of  the  values  of  various 
items,  in^iether  of  capital  or  of  income.  These  values  are, 
in  each  case,  the  product  of  two  factors,  the  quantity  of 
the  good  valued  and  the  price  of  that  good.   We  have 
now  fished  the  study  of  one  of  these  two  factors,  price, 
and  there  remains  for  us  only  the  study  of  the  other, 
quantity.   We  have  explained  how  the  price  of  instruments, 
property  rights,  and  benefits,  which,  enter  into  capital  and 
mcome  accounts,  is  determined.    We  have  still  to  explain 
how  the  quantities  of  instruments,  property  rights,  and 
benefits  are  determined.   What  determines,  for  instance, 
the  quantity  of  wheat  which  a  given  wheat  field  will  pro- 
duce; what  determines  the  quantity  of  the  wheat  fields; 
what  determines  the  quantities  of  human  beings  on  a  given 
area;  what  determines  the  quantities  of  the  necessities, 
comforts,  luxuries,  and  amusements  of  life  which  a  nation 
or  an  individual  possesses?  Once  we  can  explain  these 
quantities,  we  have  completed  our  task  of  explaining 
economic  quantities,  prices,  and  values.   We  shall  then 
be  able  to  explain  — at  least  in  general  terms  — why, 
for  instance,  the  quantities  and  values  of  the  capital  or 
BMonae,  fai  caiiftalHuxoiuits  or  In  income-accounts,  of  some 

4te  _ 


SksI 


wcom  noK  capital 


4" 


oommnnitiesor  imttvidttab  are  so  great,  and  those  of  others 
to  Uttle;  why  the  benefits  flowing,  from  one  piece  of  land 
are  so  great,  and  from  another  so  small ;  and  so  forth. 

Our  purpose  is  not  so  much  to  reach  absolute,  as  rda- 
tive,  RMilts.  care  less  about  the  absolute  population 
of  the  0obe  j  about  population  relatively  to  land.  We 
care  less  abc  ^  world's  total  yield  of  wood  than  about 
the  yield  per  capita,  or  per  acre ;  less  about  the  total  yidd 
of  doth  than  about  the  yield  per  capito  or  per  loom.  In 
general,  we  care  less  about  the  total  amount  of  the  yield 
from  the  aggregate  of  any  kind  of  capital  than  about  the 
yield  per  capita  and  per  unit  of  that  particular  kind  ci 
o^taL 

Our  prasent  search,  then,  is  for  relative  quantities,  <* 
for  relative  values.  There  are  two  sets  of  sudi  quantities, 
or  of  such  values,  which  are  of  special  unportance  in  our 
study.  One  is  the  quantity  and  vahie  of  incosne  per 
unit  of  capital  which  yields  the  income,  and  the  other 
is  the  quantity  and  value  of  income  and  of  capital  per 
human  beit^  who  owns  the  capital  and  the  income  from  h. 
The  first  leinesents  the  distributi(m  of  income  relatively  to 
the  agents  which  produce  it.  The  s  cond  represents  the 
distribution  of  income  and  of  capital  among  their  owners. 
The  study  of  the  first  will  occupy  our  attention  in  this  and 
the  fdkmiiq;  diapter.  In  the  present  cbjKpta  we  ^att 
consider  income  produced  by  capital  (in  its  narrow  sense, 
».«.,  exclusive  of  hxmian  oeings) ;  in  the  following  chapter  we 
shall  consider  income  produced  by  labor,  or  human  beings. 

It  is  well  to  beer  in  mind  that  income  is  usually  a/sM 
product  of  labor  and  capital;  for  labor  and  capital  are 
usually  "  complementary  "  to  each  othor,  each  helpng  the 
other  to  produce  the  joint  product  of  both.  It  is  coo- 
voiient,  howev»,  in  thought  to  separate  the  two. 

Our  immediate  task,  therefore,  is  to  study  the  ratios  of 
income  to  capital.  We  take  up  first  the  ratio  <rf  the 
value  of  the  income  to  the  quat$iUy  <d  cental  wUdk  yidisft. 


4X3    lUMXNXASY  PSWdPUS  OT  lOOMQIIlCS  lOur.mn 


This  ratio  is  called  nut.  Rent  at  here  tued  meant  the 

value  of  income  yielded  per  physical  unit  of  capital  Thus, 
land  may  yield  a  "rent"  of  $io  a  year  per  acre;  or 
houses,  of  $1000  a  month  per  house.  The  concept  of  rent 
here  employed  is  tomevHiat  broader  than  the  popuUtf  con- 
cept; for  it  includes,  besides  the  rent  explicitly  named  in 
a  lease  between  landlord  and  tenant,  the  rent  which  is 
implicit  when  there  are  not  two  persons  involved,  but 
landlnd  and  tenant  are  one  and  the  same  person.  EzpUdt 
rent  is  rent  in  the  usual  and  strict  sense  of  the  term. 
Implicit  rent  is  often  called  capitalists*  profits.  That  is, 
Itnt  ii  explicit  when  the  income  is  stipulated;  it  consists  of 
a  definite  paymoit  fw  the  use  of  the  instaanent  Ttik 
occurs  when  the  owner  of  the  instruniait  sells  its  use, 
».«.,  "kts"  or  "rents"  it  to  another  person  and  gets 
from  it  a  defim'te  money-income.  Implicit  rent  occurs 
when  the  income  is  not  stipulated,  and  therefore  can 
only  be  appraised.  When  a  landlord  roits  hit  hmd  to 
a  tenant  for  $1000  a  year,  the  rent  is  explicitly  $1000  a 
year;  when,  instead,  he  works  the  land  himself  and  makes 
from  it  an  income  which  crasists  in  the  production  of 
crops,  the  rent  is  only  implicit.  Before  he  can  state  its 
amount  he  must  appraise  the  crops,  including  both  those 
porti(ms^chhe  sells  and  those  consumed  by  himself  and  his 
family.  If  he  appraises  the  ctogn  awl  other  benefits  iHddi 
he  receives  from  the  land  at  $3000  and  the  costs  at  $2000,  hk 
net  income  is  liooo,  and  therefore  his  implicit  rent  is  $ioco. 
A  "  rented  "  house  bears  explicit  rent,  but  a  house  lived 
in  by  the  owner  has  an  impUcU  rent,  is.,  whatever  benefits 
it  yields  to  the  owner  reckoned  over  and  above  its  costs. 

The  most  common  kind  of  instruments  explicitly  rented  is 
real  estate,  although  many  other  more  or  less  durable  com- 
modities, such  as  furniture,  hones  and  can^tfes,  triffiliflinfi, 
pianos,  typewriters,  and  even  (^thin^  nay  at^^^fm  be 
C3i|>Ucitly  rented. 

Eip&it  rent,  being  stipulated,  is  usually  fixed  and  certaiH 


noon  fiflii  cotBAL 


413 


—  at  least  for  all  practical  purposes ;  in^tlidt  rent,  on  the 
pawc  hand,  fa  nriaUi  mi  muBtrtaim. 

Although  a  piece  of  real  estate  is  QsnaOy  vnted  as  a 

whole,  including  both  land  and  imfwovements  thereon, 
sometimes  the  land  and  the  unprovements  are  rented 
separately.  Thus  a  man  may  lease  an  empty  building 
and  then  main  a  siqipkme&tazy  coDtiact  to  haae  a 
building  to  be  erected  thereon  by  the  landlord.  The 
rent  of  land  separately  is  called  pouni  rent.  Even 
when  ground  rent  is  not  separated  in  contract,  it  may, 
for  purposes  of  dlscussioii,  be  separated  in  thought;  so 
that  all  land  bears  ground  rent,  either  explicit  or  implidt 
Ground  rent  has  been  the  subject  of  a  vast  amovmt  of  dis- 
cussion. It  underlies,  for  instance, "  the  single  tax  "  propa- 
ganda, which  advocates  that  taaea  shall  be  laid  OBgroaad 
rent  akme. 

There  are  two  important  peculiarities  of  land  which  are 
shared  by  very  fewother  instruments.  One  of  these  peculiar- 
ities  is  that,  practically  spealdBg,  the  land  in  the  watid  it 
fixed  in  quantity.  Except  by  filling  in  tidal  lands,  as  in 
Holland,  and  in  a  few  other  instances,  we  cannot  add 
to  the  world's  acreage ;  nor  can  we  subtract  from  it  It 
is  tme  that  in  some  cases  we  may  materially  hiereaia  lt» 
productivity  by  irrigation,  fertilizing,  etc.,  on  the  one 
hand,  or  decrease  it  by  erosion  and  exhaustion  of  the  sofl 
and  other  abuses  on  the  other.  These  alterations  in  knd 
are  more  important  than  hu  sometfrnes  been  recognised, 
and  thdr  importance  is  increasing.  For  the  present, 
however,  we  shall  assume  a  jununity  in  which  the 
land  remains  unchanged,  both  in  quality  and  quantity, 
possessing,  as  Bicardo  eipmsed  it,  "natnial  and  inde- 
structible powers  of  the  soQ."  For  our  purpose  it  is  enouc^ 
to  UKOM  that  th«  kad  is  indestnictiUe.  Whether  it  be 


414  musMXAiy  mnorui  ot  ■«9-^in  |CkA».xxiit 

Batunlomot  fa  a  matter  of  indifference;  {mdiely  the  same 
prindpfe*  of  vahutioo  appty  to  the  kad  which  was  wrwted 

by  our  ancestors  from  the  vdldMiMB  as  isppfy  to  *Hrh 
was  sdely  a  gift  of  nature. 

The  second  peculiarity  of  land  is  that  its  different 
qualities  cannot,  in  mo^  cases,  be  as  fully  separated  and 
classified  as  the  different  qualities  of  most  other  kinds  of 
wealth.    We  can  sort  wool,  for  instance,  into  different 
kinds  or  categories  and  label  and  sell  each  kind  separately. 
The  same  is  true  of  wheat  or  coffee  or  automobiles.  Each 
separate  kind  is  then  regarded  as  a  separate  commodity. 
But  it  is  not  practicable  to  sort  different  kinds  of  land, 
because  the  different  kinds  are  inextricably  intermingled 
and  cannot  be  moved  apart,  and  because  one  (dement  in 
the  character  of  land  —  its  situation  —  differs  materially 
with  every  individual  piece  of  land.    Any  classification 
iiHiich  wouW  really  "  standardize  "  lands,  —  that  is,  make 
the  lands  in  any  one  class  suiBdently  homogCBeons  as  to 
bear  substantially  the  same  price  per  acre,  —  woidd  have 
to  be  too  minute  a  classification  to  be  of  any  practical 
value.    In  the  case  of  ordinary  commodities  which  are 
"atandardized  "  there  exists  but  one  price  for  each  cate- 
gory.    But  the  price  of  land  differs  with  each  individual 
piece,  varying  ahnost  continuously  from  nothing  up  to 
I870  a  square  foot,  the  record  recently  set  in  New  York 
City. 

The  prices  of  land,  for  the  most  part,  follow  the 
principles  of  substitutes  or  competing  articles.  It 
tn»  that  the  various  lands  are  not  all  substitutes.  A 
dty  building  site  is  not  a  substitute  for  ^Hieat  land,  nor 
fa  it  a  substitute  for  forest  or  mineral  lands.  But  here, 
again,  for  the  sake  of  simplicity,  we  first  consider  only 
wheat  lands,  and  shall  assume  that  all  these  wheat  lands 
are  incapable  of  any  other  {Nroduct  and  differ  01^  as  to 
productivity  of  wheat.    We  therefore  assume:  — 

(i)  That  these  wheat  lands  are  fixed  k  qosatity. 


■nil 


.  (a)  That  they  differ  in  quality  (»^.,  productivity)  by 
ooDtiiiiious  gradatl(*u  firam  very  fertile  to  very  infertile 
lands,  eadi  ind  tad  invariabk  ••  to  ivImU  piodnelMty 
mi  having  no  other  product. 

(5)  That  the  coitd  tilling  each  acre  it  likewiie  fixed  and 
invafiaiiie,  say  $ia 

(4)  That  the  lands  are  sabstantially  equal  in  accessibility 
(thiis  being  in  a  conunon  land-market  and  oontributing 
wheat  to  a  common  wheat-market). 

Let  vs  suppose,  as  represented  in  Figure  46,  an  island 
MfiUing  the  four  coaditioin  above  mentimed.   In  onkr 


Tta.  4S. 


fxirther  to  amplify  the  picti»^  let  us  sui^)ose  the  mott 
tortile  land  tit^mtwl  in  tlie  osBler  ^^pfM*  ai  pmitwinf^  t$ 


4x6  naoMXAfty  rwanif  at  ■miioimi  |Qu».xxm 


buihds  of  wheat  per  acre  per  year,  and  the  other  lands 
uiMned  around  it  iptel  fuMon  in  tin  onfar  of  deioaMl- 

iBg  productivity.  If  there  is  a  superabundance  of  the 
«S-kttshel-per-acre  land  so  that  it  can  be  had  merely  for  the 
Uouble  of  occupying  it,  and  there  is  no  proq)ect  that  any 
inferior  grade*  will  tver  need  to  be  used,  the  land  wiB  be, 

like  air,  without  value,  and  will  yield  no  rent.  The  reason 
is  that  the  supply  of  land  of  the  first  qualit  which 
may  be  had  free,  exceeds  the  amount  demanded.  We 
haw  seen  that  under  audi  extreme  conditioitt  of  supply 
and  demand  the  price  is  zero.  No  one  will  pay  fior  die 
use  of  Umd  when,  without  traveling  farther  than  across 
ft  fidd,  there  is  plenty  of  equally  good  land  to  be  had 
for  nothing.  The  wheat,  however,  w:!!  have  a  pOct  equal, 
as  previously  explained,  to  its  marginal  desirability  meas- 
ured in  money  and  also  to  its  marginal  cost  measured  in 
money.  But  we  have  already  assumed  that  this  cost  is 
i»d  for  each  grade  of  land  and  is  tlie  saa»  Inr  every  bmhcL 
ConsequenUy  the  price  of  wheat  is  in  this  case  simfiy  tfnat 
to  the  marginal  cost  of  producing  the  wheat.  For,  if  sellers 
ahouk!  try  to  sdl  above  this  cost,  buyers  would  prefer  to 
grow  the  wheat  at  that  cost  themsdves.  Hence  the  value  of 
a  bushel  produced  on  an  acre  of  the  first-grade  land  is  only 
just  equal  to  the  cost  of  produang  wheat  there,  which,  at  |io 
per  acre  for  as  bushels,  is  $io  -j-  25,  or  40  cents  per  bushel. 

But  if  the  population  so  dumges  as  to  create  a  denmnd 
for  wheat  which  cannot  be  supph'ed  from  the  most  fertile 
land,  some  of  the  next  grade  of  land  will  be  used,  yielding 
34  boahdbi  per  acre.  What  was  before  true  of  only  the 
first-grade  land  will  then  be  true  of  tl^  secMMi-gnuie  land. 
It  will  be  valueless,  and  will  yield  no  rent.  But  no  longer 
will  this  be  true  of  the  first-grade  land.  It  will  have  a 
vahie  and  yi^  a  rent.  For  there  will  be  a  rise  in  the 
price  of  wheat.  The  price  will  still  be  equal  to  the  mar- 
ginal cost,  hut  now  the  marginal  cost  is  the  cost  of  producing 
a  bushel  on  the  second-grade  land.   The  value  of  the  24 


4«T 


bushels  produced  on  this  land  wfll  now  be  equal  to  the 
cost  of  producing  24  busheb  on  that  land,  i^.,  $10.  The 
marginal  cos^t  is,  therefore,  fio    34,  or  41.6  centa  a  bwbd. 

But  since  there  cannot  be  two  prices  for  the  same  article 
in  the  same  market,  the  price  of  the  wheat  produced  on 
the  firtt-grade  land  must  be  the  same  as  that  produced  on 
the  second  grade.  CooMqoently,  the  owners  of  the  ftnt> 
grade  land  now  have  a  crop  worth  more  than  the  cost  of 
producing  it,  and  can  now,  if  they  choose,  obtain  a  rent  for 
it  equal  to  the  excess,  i.e.,  one  bushel  per  acre ;  for  a  tenant 
paying  the  equivalent  of  one  bushel  per  acre  wookl  hava 
24  bushels  for  himself,  which  is  exactly  the  same  as  he 
would  get  if  he  took  up  a  claim  for  himself  on  the  second- 
grade  land ;  and  if  the  landkml  riiould  attenq>t  to  charge 
more,  he  would  lose  his  tenant,  as  the  latter  would  then 
be  better  off  on  the  second-grade  land.  If  he  charged  less, 
he  would  be  besieged  by  applications,  and  would  put  vp 
his  price.  The  market  would  be  deared  by  a  rent  of  000 
bushel  per  acre.  In  money  this  is  41.6  cents  per  acre.  II 
the  owner  does  not  rent  his  land  to  another,  but  enjoys  the 
product  himself,  he  is  still  said  to  obtain  41.6  cents  an  acre 
of  hnpBcit  rent. 

If  the  popult  tlon  changes  again  so  as  to  require  a  resort 
to  the  thlv;!  grade  land,  the  price  will  be  still  higher,  viz., 
$10  +  or >^  cents  per  bushel ;  and  the  rent  <A  the  first- 
grade  land  wiA  rise  to  equal  the  difference  between  ito  pro- 
ductivity and  that  <^  the  third-grade  land,  vis.,  2  buslMla 
per  r  ere  or  3  <  43J  cents,  i.e.,  87  cents  per  acre.  Likewise 
the  second-grade  land  will  now  bear  a  rent  equal  to  its 
■up«tolt>  oiver  the  third  grade,  VIZ.,  Qoe  bushd  pcpaowy 
or  43I  cents.  In  the  same  way  we  may  reckon  the  re^ 
und»  other  states  of  land-occupation.  In  each  case  the 
rent  of  any  grade  of  land  is  Uie  diffooux  between  its  jan- 
diKtivity  and  the  productivity  of  the  worst  or  marginal  huMl 
occupied.  If,  for  instance,  Uie  lowest  grade  of  land  occu- 
pied Is  that  indicated  in  the  tabk  aa  haviaf  •  piodiicMy 


4l8    ELEMENTARY  PRINCIPLES  OP  SOONOMICS  ICbat.XZIII 

of  9  bushels  per  acre,  the  rent  of  the  first  9»de  is  now  35  - 

9,  or  16  bushels  per  acre ;  that  of  the  second  grade,  34  -  g, 
or  15  busheb  per  acre ;  that  of  the  next,  23  -  9,  or  14  bushels 
per  acre ;  and  so  on  down  to  the  worst  land,  which  bears  no 
rent.  Since  the  price  of  wheat  is,  in  all  cases,  its  cost  of  pro- 
duction on  the  worst,  or  no-rent  land,  it  will  now  be  $10  for 
9  bushels,  or  li.ii  per  bushel.  Therefore  in  money  the  rents 
of  the  vaiious  lands  from  the  best  to  the  worst  will  be:  — 

16  X  $1.11  or  $17.76  per  aoe, 
IS  X  $1.11  or  $16.65  per  acre, 
14  X  $1."  or  $is-S4  per  acre, 
etc. 

The  last,  worst,  or  no-rent  hind,  b  s(»netmies  abo  called 

the  "  Ricardian  acre  "  in  honor  of  Ricardo,  who  first  stated 
this  doctrine  of  land  rent.  Its  scientific  designation  is 
"marginal  acre " ;  that  is,  it  is  the  last  acre  whose  cultivation 
can  be  made  to  pay.  This  marginal  land  in  a  sense  forms  a 
standard  by  reference  to  which  the  rent  of  all  other  land 
may  be  measured,  and  the  cost  of  producing  wheat  on  this 
marginal  land  sets  the  price  of  wheat  for  all  lands,— for 
there  can  be  but  one  price  of  wheat  in  the  same  mailcet 
We  have  reached,  then,  two  important  results  true  irndtr 
the  conditions  supposed,  — 

(1)  The  price  of  wheat  is  equal  to  its  cost  of  production  on 
the  margin  of  cultivation. 

(2)  Ground  rent  of  any  land  is  the  difference  between  tl^ 
productivity  of  that  land  and  the  productivity  of  land  on 
the  margin  of  cultivation  (i.e.,  the  poorest  land  cultivated). 

With  an  increase  of  population,  then,  the  price  of  wheat 
and  the  rent  of  wheat  land  will  rise,  and  the  owner  of  good 
land  will  become  gradually  wealthier  merely  through  the 
iiKxeaae  in  population.  He  receives  an  increase  in  rent ; 
*nd  ther^ore  the  value  of  hmd  ~  the  capitaUted  or  dis- 
counted rent  — will  increase  also.  This  increase  in  the 
value  of  the  land  is  sometimes  called  the  "  unearned  incre- 
vamt "  because  it  is  due  to  no  labor  on  the  part  of  th» 


Sk.  a] 


iNcoMx  waxm  caktal 


4»9 


landowner.  (It  should  be  noted,  however,  that  dmiag  the 

transition  of  rents  from  low  to  high,  those  who  fueaee  a 
rise  in  rent  will  discount  in  advance  the  larger  future  rents ; 
not  all  so-called  "  unearned  increments  "  are  unexpected.) 

These  condusioos  bold  absolutefy  under  the  condition^ 
amuned.    But  in  the  actual  world  these  cniM^{^ 
never  exactly  realized.    Instead,  we  find : — 

(i)  Land  is  not  absolutely  fixed  in  quantity. 

(a)  The  productivity  of  any  piece  of  land  b  not  fixed,  but 
varies  from  time  to  time  both  in  kind  and  in  degree,  and  thb 
productivity  will  vary  with  the  price  of  its  product,  e^., 
wheat. 

(3)  The  cost  of  tilling  land  b  not  fixed,  but  varies  with 
different  land,  and,  indeed,  as  we  shall  {xeseatly  show,  is 
influenced  by  the  price  of  the  product. 

(4)  Some  lands  are  much  more  distant  to  reach  and 
occxipy  than  others  and  thdr  product  mudi  nrare  diflkuit 
to  bring  to  market. 

(5)  The  land  may  be  capable  of  more  than  the  one  use 
of  wheat-growing,  and  a  change  in  the  price  of  wheat  may 
shift  the  use  to  which  certam  lands  are  put.  No  theory  of 
land  rent  is  complete  which  assumes  that  the  difference  in 
quality  among  lands  is  merely  a  matter  of  different  ftmftmifai 
of  one  product,  like  wheat. 

We  have  already  discussed  the  first  of  these  points  and 
find  it  to  be  of  little  practical  importance.  The  second  is 
that  the  productivity  of  land  is  not  solely  a  matter  of  natural 
fertility.  This  might  be  the  case  with  some  mineral  spdagfi 
or  oil  wells;  but  in  most  cases  eadi  piece  of  land  may  be  more 
or  less  intensively  cultivated,  and  a  rise  in  the  price  of  wheat 
will  stimulate  wheat  production  on  all  lands,  the  better 
grades  included.  Thus,  if  the  first  grade  produced  25  bushels 
wtoi  no  other  Umd  was  in  use,  it  would,  wfth  moR  oirtk^, 
produce  more  than  35  bushels  as  sow  as  the  noEt  gnde 
was  in  use;  and  the  poorer  the  worst  grade  was,  and 
the  higher  the  price  of  wheat,  the  greater  would  be  the 


430  BLmsNXAftY  ntiMCDn^  or  icGMOHics  K^.xxm 

amount  grown  by  those  cultivating  the  wapenar  gnuks  ot 
la&d.  In  other  words,  a  change  in  the  price  of  wheat  would 
not  only  affect  the  amount  of  land  imder  cultivation,  but 
would  affect  also  the  intensity  of  cxiltivation  of  each  piece 
of  land.  The  prodoctivity  ol  eadi  acre  h  not  a  constant 
quantity,  but  is  indirectly  dependent  on  the  price.  Each 
acre  wUl  be  cultivated  up  to  that  degree  of  intensity  at 
which  the  last  dollar's  worth  of  cost  will  barely  repay  itself. 
That  is,  not  only  is  there  a  margin  of  cultivadon  as  to 
icret  —  in  other  words,  a  last  acre  which  it  pays  to  culti- 
vate —  but  there  is  also  a  margin  of  cultivation  for  every 
acre,  good  or  bad,  i.e.,  the  last  degree  of  effort  or  cost 
which  it  pays  to  put  forth  on  that  acre.  Each  acre  will 
be  tilled  until  this  marginal  cost  of  tilling  agrees  with  the 
market  price  as  determined  by  the  cost  of  producti<m  on 
the  most  infoior  land. 

Again,  as  to  the  cost  oi  tilling  land  per  acre,  this  b  by 
no  means  a  constant  quantity  for  all  lands,  both  good  and 
poor ;  nor  is  it  constant  even  for  the  same  land.  The  cost 
oi  tilling  per  acre  may  be  either  higher  or  lower  on  good 
land  than  on  poor  land ;  and,  as  implied  above,  the  OMt 
on  any  land  will  vary  with  the  price  of  the  product,  just 
as  the  product  itself  varies  with  the  price.  The  farther 
cultivatioD  b  extended  to  poorer  and  poorer  lands  or  the 
more  intensively  the  MINI  Itmi  is  cultivated,  the  gMai« 
will  be  the  marginal  cost  This  is  the  law  of  increasing 
cost  applied  to  agriculture.  It  is  als^)  (then  called  "  the 
km  «f  diminiil^  retun»" ;  for  to  say  f hat,  as  cultivation 
ii  iMlMf  txtmded  or  interaMed,  the  cost  of  p  mill  ring  • 
gfven  amount  of  wheat  continually  increases  is,  turmd 
about,  evidently  the  sa|M  thing  a&  to  say  ihml  the 
tmmnt  prodtieed  al  a  fiven  cmi  continually  dMthbes. 
hi  aa  msMdy  ammi  tktoty  the  mnAan  MpiVMiiif 
(,fr^.,rtivity  in  Figure  4/^  m^t  he  concffved  as  int/^as 
ing  sM0itiy  the  tmrgin  oi  (iiltivation  is  §%tfnM, 
§a4      maiieti  esijit^tg       will  md     do^f  •  em- 


8k4 


mcoM*  wmom  cmrtal 


491 


stant  fio  per  each  acre,  but  will  differ  among  different 
kinds  of  land  according  as  the  soil  is  rocky  or  not  resistant 
to  the  plow  mi  hutow,  levd  oar  uneven  in  SBrleoei  cob* 
taining  obstructions  such  as  trees,  or  free  of  obstructioM. 
Moreover  the  cost  will  not  be  invariable  even  for  a  given 
land  but  will  increase  slightly  as  the  margin  is  extended. 

Apia,  lands  differ  so  i4ddy  as  to  accenibiBty  that 
tenants  are  reluctant  to  leave  English  lands,  for  instance, 
to  take  up  lands  in  the  Mississippi  valley.  A  slight  ad- 
vantage in  the  latter  over  the  former  will  not  suffice  to 
pntiucv  mH%mfciii  bona  tiie  English  to  the  Axnerfam 
lands  and  to  reduce  the  rents  of  the  former.  Only  when 
the  advantage  is  considerable  will  emigration  ensue.  The 
readjustments  of  peculation  are  therefore  not  as  delicate 
as  lOw  sadloitBMali  el  between  two  comMc^g 

reservoirs  seeking  a  conmion  levd.  They  resemble,  rather, 
the  readjustments  of  a  viscous  flvud  like  pitch  which  re- 
quires a  considerable  difference  of  level  befoee  the  fluid 
win  flowitf  aO.  The  mm  vktmhf  apfte  is  a  len 
degree  to  the  products  of  lands.  These  do  mot  ccmpeCe 
on  even  terms,  for  some  lands  are  distant  and  others  near 
the  common  market,  and  scmie  have  good  and  others  poor 
tOHM^MrtiUiaB  iMflitieL  Timt  iUkmrnem  wm  apa^Eiy 
haportant  in  the  case  of  bxilky  jHroducts  such  as  hay  whidi, 
tor  the  reasons  jvat  pvea,  cKftaa  vary  wMri^  price  hi 
different  localitiea. 

Wkie,  thrrrfw,  the  *Mf  «f  Mat  •■  tktm  gtvea  is 
correct  under  the  ideal  cooditknis  assumed,  it  is  not  abso- 
lutely correct  under  the  actual  conditions  we  find  in  the 
worid.  But  the  modifiratitms  necessary  to  make  the 
iimiij  ol  giwiad  nat  tne  to  lie  are  w  as  aot 
materially  to  chwge  the  practical  tmts.  It  still  remains 
stibetaatially  true  that  the  rent  of  any  whrat  land  is  equal 
to  t^  differen<x  between  its  prodtictivity  and  the  pro- 


433    BUMIMTARY  FRXNCIPU8  OF  XOONOmai  (Quv.XXm 


Sa.  Rent  and  Interest 

The  principles  of  ground  rent  apply  also  to  house  rent, 
piano  rent,  or  rent  of  any  other  kind,  except  that  much 
greator  divergencies  from  such  stereotyped  figures  as  we 
gave  for  ground  rent  will  be  neceasaiy  in  these  cases.  In 
particular,  houses,  pianos,  etc.,  are  not  essentially  fixed  in 
quantity,  but  their  quantity  will  be  changed  according  to 
tiMir  rent  and  their  price  (which  is  the  discounted  value  of 
their  rent).  The  difference,  then,  between  the  rent  of  land 
and  the  rent  of  other  instruments  is  a  diflTerence  in  the 
character  of  the  supply.  The  supply  of  land  is  relatively 
iawi ;  other  instruments  are  reproducible.* 

It  is  important  to  tin^imUmd  this  difference  and  abo  not 
to  confuse  it  with  a  common  fallacy  that  land  rent  alone 
|»  truly  rent,  and  house  rent  and  other  rent  are  really 
\  It  it  mKy  to  see  that  land  rent  may  be  equal  to 
:  OB  tito  furflitvai—  of  tke  land  Just  m  tmly  as 
rent  may  be  equal  to  the  interest  on  Ike  a^ital- 
of  tke  house.  In  that  case  both  are  rent  and  both 
«•  fattercst ;  they  are  sinq>ly  two  diSerent  ways  <rf  measur- 
ing the  same  income-vahK.  Km*  ia  ntmmati  per 
of  physical  capital,  as  for  instamre  per  acre;  »teiest  is 
per  cent.  That  is^  rent  is  income  considered 
milMeft  to  the  quatUky  oi  the  capital  yielding  it;  it  is 
e^Mcased  as  so  many  doJhts  pm  acre  w  per  pMw  or 
other  rented  unit  of  weal  A  Interest  is  tlK  same  mc(mm 
omdctered  relatively  to  the  value  of  the  capital  yield^ 
it;  it  is  expiessed  as  so  many  cents  of  income  <»i  the  dol- 


>  This  practical  diffaMce  \Mnm  wnmd  fwk  Md  otter  rent,  such  as 
teuK  nnt,  has  an  ba^antat  applicatkm  In  tuatioB.  li  is  aot  within  the 
acopc  of  this  book  to  consider  problems  of  taxation.  In  treatises  on  tax- 
atioi  it  is  Aown  that  a  tax  on  ground  rent  falls  on  the  landlord  and  does 
not  appreciably  affect  the  tenant,  because  it  cannot  affect  the  si^piy  of 
land,  which  is  practically  fixed  by  nature;  whenas  a  tax  mi  house  swt  it 
borne  partly  by  the  tenant,l»8ai«»  it -  -  — 
the  suppfy  of  houses. 


Scc.41 


mooMB  num  cAnxAZ. 


493 


lar  of  capital,  i.e.,  as  a  simple  percenUge,  such  as  five  per 
coit. 

To  illustrate,  let  us  suf^Mse  a  quantity  of  land — ten  acres 
—  to  have  a  value  of  $1000,  and  that  $50  a  year  is  paid 
for  its  use.  This  $50  is  both  rent  and  interest  It  is  the 
rent  on  the  ten  acres  and  the  interest  on  the  fxooo.  The 
rent  is  $50  per  year  for  10  acres,  or  $5  per  acre  per  anmma. 
The  interest  is  $50  per  year  for  $1000,  or  five  per  cent  per 
annum.  In  precisely  the  same  way,  let  us  suppose  a  quan- 
Hty  ci  hoiaes  —  ten  houses  —  to  hsve  s  vofae  of  $100,000, 
and  that  $5000  a  year  is  paid  for  their  use.  This  S5000  is 
both  rent  and  interest.  It  is  the  rent  on  ten  houses  and 
the  interest  on  $100,000.  The  rent  is  $5000  per  year  for 
ten  houses,  or  $500  per  house  per  annum,  and  the  intmst 
is  $5000  per  year  for  $100,000,  or  five  per  cent  per  annum. 

The  erroneous  belief  that  land  bears  only  rent,  and  that 
other  instnmients  bear  only  interest,  is  to  a  large  extent 
reqxHttible  for  the  narrow  definiticms  of  capital  ^diich 
are  so  often  given  and  which  are  so  framed  as  q)edfica]ly 
to  exclude  land.  A  true  analysis  justifies  the  usage  of 
business  men  who  apply  the  term  "  rent as  freely  to  in- 
come from  houses  as  to  income  from  land,  and  the  term 
"  interait "  as  fredy  to  iDoome  from  land  as  to  iaoome  fn»n 
kometi 

$  4.  Four  Forms  ol  Income :  Interest,  Rent,  Dividends, 

If  now  we  gather  together  what  was  said  in  regard  to 
oqrfidt  and  inqdidt  rent  aoA  the  rdations  between  rent 
and  interest,  we  shall  see  that  there  are  four  chief  fonns  ta 
which  men  receive  income  from  capital.  These  are  ordi- 
naifiy  known  as  interest,  rent,  dividends,  and  profits. 
In  Ofder  to  disdnguisb  ihem  dearly,  let  us  suppoie  four  ' 
brothers,  each  of  whom  inherits  a  fortune  of  $100,000.  Tbt 
first  invests  his  $100,000  in  a  land  compaay  ia  one  hua- 


died  $1000  bonds  at  par  bearing  five  per  cent  interest. 
He  then  receives  $5000  a  yew,  wMdi  is  interest  in  the  narrow 
or  eiplidt  sense  of  the  term.  The  next  brother  inveHi  Us 
f  zoo,ooo  in  a  ranch  of  a  thousand  acres,  which  he  rents  to 
a  tenant  for  $5  an  acre.  He  then  receives  an  income  of 
$5000  a  year,  which  is  iwmI  in  tiie  narrow  and  ezpUdt  sense. 
The  third  brother  invests  his  $100,000  in  a  hiOMbad  t^ans 
of  stodc  in  a  land  company,  buying  them  at  par,  or  fiooo 
per  share.  This  stock  we  shall  assume  yields  him  five  per 
cent,  and  he  receives  an  iMSM  of  I50M  m  dMtfsmb  (also 
caUed  profits).  The  fourth  brother  invwii  1^  ^00^  in 
a  ranch  of  a  thousand  acres,  which  he  proceeds  to  operate 
Mmself.  Supposing  that  he  succeeds  in  securing  a  net 
income  of  $5  per  acre,  is  wfi  be  receiving  $5000  a  year  of 
profits.  Each  of  these  brothers  is  receiving  an  mocmie  of 
$5000  a  year  from  capital  in  the  form  of  real  estate;  but 
they  are  all  receiving  their  income  under  different  conditions. 
The  four  types  of  iawae  aagr  be  arranged  as  follows:  ^ 

(1)  Litncstperoaat.  (3)  Dividends  (or  praita)  per  cmL 

In  the  iflper  ||»,  BMi^  far  birtkw  (i)  |«d  (3),  the  in- 
come is  expre^ed  as  a  percentage  of  the  vdne  ef  the  -nirfti! 
In  the  lower  line,  namely,  for  brothers  (2)  and  (4),  the  in- 
come is  expressed  per  acre.  As  we  have  seen,  eilbcr  ea- 
pressiaB  can  be  translafeei  iatm  Hk  other. 

Again  the  first  column,  wmmlfy  for  bn^ns  (i)  ami 
(2),  represents  the  explicit  or  assured  income,  while  the 
second  column,  namely,  for  Imthers  (3)  and  (4),  represents 
Ae  bip&it  or  UMnrtaiii  inrii  .  'Sk  int  two  brothers 
nave  m  assured  or  stipidtted  iaoum  ef  $5000.  The  faMi 
^  «»c<!rtot»  or  precarious  income  which,  though  we 
have  apposed  it  to  be  $5000,  may,  and  probably  will,  fluc- 
tuate Inm  time  to  IfaM.  -^--rhi  full  I  iMiji,.. 

between  the  first  two  and  the  last  tm  hwtheis  in  iipid 
to  the  risk  involved.  The  fiat  two  m  ■nniiiiiiillji  Mtmmi 


Sac.4l 


Ofoow  fioii  aaftjo. 


425 


of  risk,  some  one  else  assuming  the  risks  of  managing  the 
laad  of  the  company  or  of  running  the  ranch,  and  guar- 
ttBteefaig  t*  these  biottos  a  certain  st^poid  ci  $$000  t 
year  each.  Corre^nding  to  this  fundamental  difference 
in  risk  is  a  fundamental  difference  in  variability.  The  in- 
comes of  the  first  two  brothers  are  regular;  thoae  of  the 
last  Un  m  impiair.  Whesv  thore  aie  ifakt  or  dmioet 
to  be  tdun  fkmt  is  irffurinily  «l  iscoae  m  » conse- 
quence. 

It  b  evident  that  some  one  must  assume  these  risks. 
Uaentaatty  irttadhes  to  Hie  f«l»r  product  beciiBse  we 
can  never  know  abs(duteiy  the  conditions  as  to  weather, 
blight,  fire,  labor  conditions,  etc.  Nature  never  offers  a 
perfectly  safe  investment.  What  is  caUed  a  safe  investment 
ii  always  in  4tt  fefm  of  a  eentifKl  %elwien  oae  BMB  and  as- 
o^KT  \fy  which  one  man  takes  risks  1^  guarantees  another 
man  against  risks.  Even  then  the  guarantee  is  not  perfect, 
so  that  the  most  "  gilt-edged  security  "  involves  a  slight 
^kmm  ef  itt,  vtife  k  mngr  ckms  asprndfce  can 
be  plaeatf  upon  a  guaiantie  baoMK  ef  iSm  WMriStUMty  of 
the  perse*  saaking  it. 

hkvffdMiess,  it  remains  true  in  a  general  way  that  ex- 
■Mdl  faeeaK  ocoiMiied  to  Mbe  heUer  of  a  nois  or  bond  fe 
ooeqMratively  certain,  while  the  iamne  to  a  stockholder  is 
imcert^n.  Investors,  therefore,  are  naturally  divided  into 
two  fn>ii{)s:  those  who  are  ^willing  to  assume  the  risks 
01  MMMie,  OT  DOMBOHMV,  eaB  WMie  WHO  aie  WUIU^  co 
aawmf  thes«  risks,  or  stockhdders.  Most  modem  enter- 
prises are  finan<:ed  by  both  of  these  two  classes  of  investors, 
part,  often  hatf,  being  owned  by  the  bondholders  and  the 
foiMliiitfif  bjf  Ae  etecUMMofe.  ii^  we  bsw  seai  bi 
the  study  of  capital  accounts,  the  stockholders'  share  is  the 
residuum  after  the  value  of  all  other  obligations  is  de- 
ducted; and  thb  residuum  acts  as  a  sort  of  a  iM^er  or 


4*6  BuniBixASY  nmanif  or  moomoKsa  (Qmkxxbi 


km  adequate  is  this  inargin  or  guarantee  and  the  greater 
the  risk  of  large  kases  to  the  stockholders  or  even  of  com- 
plete bankruptcy.  Therefore,  in  any  proper  financiering  of 
an  industrial  project,  care  should  be  taken  to  provide  that 
enough  of  the  first  cost  should  be  paid  by  stockholders  to 
fuDy  guarantee  the  bonds.  Exactly  what  constitutes  a  safe 
proportion  will  depend  on  the  particular  circumstances  of 
the  business.  Experience,  however,  has  determined  certain 
fairly  definite  proportions  for  stocks  and  bonds  of  different 
enterprises.  These  shouU  be  ascertained  by  the  intending 
investor  before  entering  into  any  particular  project 

Tb^  question  now  arises :  What  determines  the  rate  at 
whidi  the  risk  takers  in  a  business,  those  who  receive 
dividends  and  profits,  shaU  be  rewarded?  WDl  all  four 
brothers  normally  receive  the  same  income?  To  this  our 
Mswer  is,  first,  that  those  who  assume  risk  may  receive 
eitiber  a  larger  or  a  smaller  income  than  those  who  do  not, 
and  probably  over  a  long  period  of  time  will  receive  a  fluctu- 
ating instead  of  a  steady  income.   Probably  on  the  average 
the  risk  takers  wiU  receive  a  larger  income  than  those 
guaranteed  agauist  risk;  for  risk  is,  or  should  be,  regarded 
as  a  burden  and  will  not  be  undertaken  unless  the  diance 
of  unusuaUy  large  returns  outweighs  the  risk  of  unusuaUy 
smaU  ones.   The  daring  spirits  who  assume  the  risk  of 
embarking  their  capital  in  ships,  railways,  and  other  enter- 
prises and  guarantee  to  their  fellow-investors,  the  bond- 
holders, a  fixed  return,  not  only  deserve,  but  in  general 
receive,  a  higher  return.    Those  who  voluntarily  assume 
risks,  as  the  stockholder,  do  so  not  because  they  like  the 
chance  of  takmg  risks,  but  because  they  hope  in  the  lojig 
run  to  be  sufficiently  rewarded  for  so  doing.    They  may, 
of  course,  be  disappointed  where  bad  luck  has  been  lui- 
usuany  persbtent  or  where  the  investors  have  been  unusu- 
ally sanguine  and  lacking  in  cauticm. 

At  the  extreme  of  incaution  are  the  gamblers  and  iwk- 
less  speculators  to  whom  a  small  chance  of  great  gain  mtp 


mcoMS  non  cjortAL 


4«7 


weighs  a  great  risk  of  moderate  losses ;  and  where  men  of 
this  temperament  predominate,  as  is  often  true  in  mining 
campt,  the  avenge  pvofitt  or  dividends  aie  ipt  to  be  kat 
than  the  interest  and  rait  wUch  tiie  centfoui,  oooMCvalive 
investor  receives. 

is-  AvoidMMe ef Bilk 

Uncertainty  being  regarded  as  an  evil  by  practically  all 
normal  persons,  there  is  a  constant  effort  to  avoid  or 
reduce  uncertainties  of  bxaam,  Jici  only  do  bondholdas 
avoid  z'  .iji  by  shifting  them  to  Other  persons,  but  those 
who  thus  assume  risks  also  strive  to  reduce  them  tr>  r  mini- 
mum. This  they  accomplish  in  various  ways,  of  wiiich  the 
following  are  impcwtant:  (i)  by  increasing  tf^Vnovdedge 
of  the  future,  (2)  by  employing  safegua-ds  ay  'ast  mis- 
chances, (3)  by  insurance,  (4)  by  speculative  contracts, 
especially  "  hedging."   We  shall  take  these  up  in  order. 

(x)  R^,  being  simply  an  expnttkm  for  human  %norance, 
Releases  with  the  progress  of  knowledge.  The  chief  lines 
of  progress  in  industry  at  the  present  time  may  be  said  to 
be  those  which  tend  to  lift  the  veil  which  hides  the  future. 
Countkw  trade  journals  exist  principally  to  eaaUe  their 
readers  to  forecast  the  future  more  sccorately  than  they 
Otherwise  could.  This  the  journals  accomplish  by  supply- 
ing data  as  to  past  and  present  conditions,  as  well  as  by 
faatructing  their  reados  in  the  rdations  of  cause  and  effect. 
Om  government  weather  bureau  supplies  weather  forecasts 
wliich  somewhat  reduce  this  form  of  uncertainty  for  the 
farmers.  Government  reports  of  crop  conditions  and  infor- 
mation as  to  diseases  of  plants  sad  animals  are  bkir  impor- 
tant influences  in  the  same  direction.  Again  the  prediction 
m  to  the  amoimt  of  ore  to  be  obtained  from  a  mine  and 
the  cost  of  obtaining  it  is  to-day  far  less  uncertain  than  ever 
before.  'Whanm  fonneify  the  taiakB^  praqpect  consisted 
el  wld  stfttoMBts  «l  te  en  «i  ill^"  and  the  time  and 


co«t  required  to  mine  it,  to-day  the  graduate  of  a  mining 
•dwol  eta,  tlnoiigii  hb  knowledge  of  coonoiBic  geology  and 
metallurgy,  m^ke  forecasts  with  some  degree  of  certainty. 

(a)  Safeguards  of  many  kinds  have  been  invented  to 
reduce  the  risk  of  shipwreck,  fire,  explosion,  burglary,  etc. 
A  modem  lUp  b  byflt  la  compartments  as  a  safeguard 
against  shipwreck ;  fire  escapes  are  a  safeguard  against  lost 
of  life  by  fire;  safety  valves  against  explosions;  and  bur- 
^ar  alarms  and  safety  deposit  vaulU  against  burglary. 

(3)  Insurance  comisto  fa  comoHdatisg  ikks,  «.«.,  fa  off- 
settmg  one  risk  by  another  by  a  isolidating  in  one  insurance 
company  a  large  number  of   oances.   Relative  certamty 
is,  as  it  were,  manufactured  oat  of  uncertainty.  Insurance, 
unlike  facreaae  of  knowledge  and  safeguards,  does  not 
directly  decrease  the  risks  for  society  as  a  whole,  but  by 
poolmg  these  risks  it  has  the  effect  of  steadying  the  income 
«rf  fadividuab  anU  spreading  the  burden  of  risk  more  evenly 
over  all.  The  owner  of  a  house  wouM  receive,  if  it  were 
not  insured,  a  net  annual  mcome  of,  let  us  say,  $500  until 
the  house  was  burned,  after  which  he  would  suddenly  find 
himself  without  any  house  to  have  an  mcome  from ;  whereas 
if  he  insures,  he  wQl  be  leceivfag  annuaUy  an  income  slightly 
less  than  before  because  of  the  insurance  premium  he  will 
have  to  pay;  but  when  a  fire  occurs,  he  will  receive  an 
fademnity  enabling  him  to  restore  the  house  and  continue 
hb  facome  ahnost  unabated.  The  same  method  of  ateady- 
mg  one's  mcome  is  obtained  by  marine  insurance,  ateam- 
boiler  insurance,  burglar  insurance,  plate-glass  insurance, 
live-stock  insurance,  hail  and  cyclone  insurance,  accident  and 
fidelity  fasurance,  empfayers'  liability  fasnrance,  and  even 
life  insurance.   If  a  wife  holds  insurance  on  her  husband's 
life,  she  avoids  the  evil,  when  widowed,  of  being  left  rela- 
tively destitute ;  for  the  insurance  provides  her  with  an  fa- 
come  which  is  a  partial  substitute  for  that  formerly  received 
from  her  husband.   He  and  she  prefer  to  sacrifice  a  yearly 
premium  during  his  lifetime  to  avoid  the  risk  of  the  sudden 


INOOIIB  IMII  CtflTAt 


complete  loss  of  income  to  her  at  his  death.  In  short,  the 
effect  of  pooling  risks  through  insurance  frees  the  individual 
of  Ite  lu|e  ^MctuitioBt  in  Ipcobm  iHrfdi  woidd  oAsmiH 
be  suffered.  The  income  of  society  fluctuates  kn,  nlik 
tivdy  speaking,  than  that  of  the  individuals  composing 
society.  This  is  true  because  the  evils  which  form  the 
CKtftordfaiary  calastitiphes  in  UKvkliial  liv«s  conttltme  • 
regular  stream  of  events  in  the  life  of  society.  Death  in  a 
family  is  an  unusual  catastrophe,  but  the  number  of  deaths 
in  a  community  forms  a  r^ular  and  predictable  series  of 
evwts.  To  the  owner  of  only  afeiryMsels  thesMpwredt 
of  one  of  them  is  an  extraordinary  catastrophe,  but  the  ship- 
wrecks of  the  world  constitute  a  regular  and  predictable 
series  of  events.  The  same  is  true  of  accidents  and  mis- 
chances  of  all  kinds.  They  are  irregular  for  the  indi- 
vidual and  regular  for  sodety.  When,  therefore,  society 
through  insurance  companies  and  otherwise  consolidates 
these  risks,  the  individual  gains  an  advantage  by  securing 
greater  certainty  and  regularity  in  Us  imtt^dual  inoome, 
even  though  the  average  boome  of  the  individual  is  not  in- 
creased at  all,  in  fact  b  decreased,  by  the  cost  of  OOO' 
ducting  the  insurance  companies. 

In  tlds  last  ooooectioD  it  should  be  noted  that  insunmoe 
indirectly  leads  to  the  reduction  of  risk ;  for  insurance  com- 
panies find  it  to  their  interest  to  reduce  the  risk  against  which 
they  insure.  Marine  insurance  companies  e]q)ect  the  ships 
to  secme  the  installation  of  salety  devices.  Fiie  insiixaiioe 
companies  do  likewise,  and  to-day  even  life  insurance  com- 
panies are  beginning  to  advise  their  poii^  holders  ham  to 
reduce  the  chances  of  death. 

In  view  of  an  that  has  been  said,  it  isevldent  that  faisiinuice 
is  one  of  the  grandest  of  human  devices  in  the  warfare  against 
risk.  As  its  importance  has  gradually  been  appreciated, 
its  use  has  been  steadily  extended,  and  in  some  cases,  as 
in  Germany,  ito  enqdoymsot  0m  certain  cases  affsetbif 
workingmen)  has  beoi  made  compulsofy. 


43©    ELEMENTARY  PRINCIPLES  OF  ECONOMICS  ICha».  XXIII 


(4)  It  seems  at  first  to  be  a  curious  fact  that  speculation, 
although  dealing  in  chances,  may  be  used  to  reduce  chance  to 
some  persons  who  use  it  for  this  purpose.  We  have  already 
seen  bow  ^ort  selling  reduces  the  risk  to  the  person  txM  to. 
A  building  contractor  when  taking  a  large  contract  was 
asked  whether  he  was  not  taking  a  large  risk,  since  he  could 
not  know  in  advance  what  the  costs  would  be.  He  replied, 
"  No,  I  am  taking  no  risks  at  all  excq>t  on  '  labor ' ;  I  have 
made  contracts  to  be  supplied  with  material  when  needed 
at  fixed  prices."  In  other  words,  dealers  had  sold  him  futiu-e 
building  materials  "  short."  They  had  each  assumed  the 
risk  of  fluctuation  in  those  spedsl  materials  in  which  they 
dealt,  thus  relieving  the  contractor  of  the  necessity  of  in- 
fomung  himself  of  the  special  market  conditions  on  stone, 
brick,  timber,  etc.  Similar  results  follow  from  short  sales 
Ol  ^mxA  to  the  wod«i  numufacturer  previoualy  dted  in 
another  connection. 

An  important  method  of  shifting  risks  is  "hedging," 
whereby  a  dealer,  for  instance  in  transporting  wheat,  may 
be  rdieved  of  the  risk  d  a  change  in  price.  He  buys  ^niieat 
in  the  West  intending  to  ship  it  to  New  York  and  sell  it  there 
at  enough  to  cover  cost  of  transportation  and  a  small  profit. 
He  aims  to  make  a  gain  in  the  form  of  "  arbitrage,"  that 
is,  a  gain  due  to  a  diffoence  in  {nice  betweoi  different 
places;  but  as  the  transportation  requires  time,  he  finds 
himself  running  the  risk  of  a  loss  —  or  gain  —  due  to  a  dif- 
ference in  price  between  different  times.  By  hedging  he 
eliminates  the  time  gain  or  Ums  and  retains  the  place  gain. 
If  he  did  not  "  hedge,"  he  might,  in  consequence  of  a  sud- 
den fall  in  price,  find  all  his  profit  wiped  out ;  or  he  might, 
on  the  other  hand,  by  a  rise  in  price,  make  much  more  than 
normal  profits.  Bdng  <rf  a  cautious  d^Msition,  he  pnkn 
an  intermediate  course  —  a  small  profit  which  is  sure, 
rather  than  the  chances  of  both  gain  and  loss.  Conse- 
quently he  hedges  "  against  loss.  "  Hedging  "  against  a 
hm  from  the  liikt  of  ooe's  busfams  is  speculatioa  so  ar* 


SicsJ 


INCOIIE  FROM  CAPITAL 


43« 


ranged  that  if  the  man  loses  in  his  regular  business  he  will 
win  in  his  speculation,  or  if  he  gains  in  his  regxilar  business 
he  will  lose  in  his  speculation.  It  is  like  betting  on  both 
rides  of  a  contest  at  the  same  time.  The  result  dimi> 
nates  largely  the  effect  of  risk  so  that  he  neither  gains  nor 
loses  from  mere  chance.  Thus  let  our  supposed  wheat 
dealer  enter  into  some  speculative  market,  such  as  Chicago, 
knowing  that  its  pikes  will  move  in  sympathy  with  the 
New  York  market,  and  there  "  speculate  "  for  a  fall,  or 
sell  "  short."  If  the  price  of  wheat  happens  to  fall  he  will 
lose  on  the  wheat  which  he  has  transported,  but  he  will 
gain  in  qpeculatiaa.  Evidently  this  man  is  running  a 
double  set  of  chances.  A  fall  in  price  will  bring  him  loss 
on  the  wheat  he  is  transporting  to  New  York;  but,  on 
the  other  hand,  it  will  bring  him  gain  in  hn  specu- 
lation bk  Chicago.  Contrariwise,  if  the  price  rises,  he 
will  gain  on  his  wheat  transported,  but  lose  in  the  specu- 
lative market.  He  can  draw  his  speculative  contrast  in 
such  a  way  and  for  such  an  amoimt  that  for  every  cent 
per  buahd  of  fall  of  price  he  will  gain  a  cent  per  bushel 
in  his  speculation,  and  for  every  cent  per  bushel  of  rise  of 
price  he  will  lose  a  cent  per  bushel  in  his  speculation.  In 
this  way  he  will  practically  eliminate  all  loss  as  wdl  as 
all  profit  axUng  from  a  change  of  price  in  time  and  keep 
&itact  the  profit  arising  from  a  difference  in  price  between 
places,  i.e.,  he  retains  the  arbitrage  gains  of  his  r^ular 
business  and  foregoes  the  speculative  gains  or  losses,  which 
are  not  his  business.  He  only  obtains  his  normal  profit, 
commission,  or  percentage  on  the  acvaal  wheat  handled, 
throwmg  the  burden  of  risk  of  speculation  on  the  specula- 
tive dealers  to  whom  he  sells  short. 

Now  it  is  evidoit  that  the  effect  of  the  short  sales  we  have 
mentioned  and  of  hedging  is  to  shift  the  risk  from  those  less 
able  and  willing  to  those  more  able  and  willing  to  bear  it. 
Those  grain  merchants  who  hedge,  for  instance,  are  reeved 
of  a  b%  liik  iHiidi  thqr  irooki  tnfier  if  th^  did  not  htd§b» 


433    ELEMENTAXY  PKINCIPLES  OF  ECONOMICS  [Chap.  XXUI 


Thus,  strange  as  it  may  seem,  they  run  less  risk  by  speculat- 
ing through  "  hedging  "  than  by  not  speculating  at  all ;  and 
as  they  thus  reduce  the  risk  of  their  business  they  are  en- 
abled to  reduce  their  margin  of  profit.  Qmaequently,  the 
public  in  the  end  receives  a  benefit  in  cheaper  grain.  The 
case  is  thus  very  similar  to  that  of  the  builder  and  the  woolen 
manufacturer.  Short  selling  and  hedging,  binding  the  future 
and  the  past,  enable  the  student  of  special  risks  to  guar- 
antee the  future  to  the  general  public.  Risk  is  one  of  the 
direst  economic  evils,  and  all  of  the  devices  which  aid  in 
overcoming  it  —  ^eUier  increased  guarantees,  safeguards, 
foresight,  insurance,  or  legitimati'  !9)ecuIatiQn  —  iquresent 
a  great  boon  to  humanity. 

If  risk  could  be  completely  eliminated,  the  profit  of  the 
stockholder  would  be  more  certain  and  steady  and  would 
average  the  same  rate  as  the  returns  of  those  who  receive 
explicit  interest  and  rent.  But,  although  there  is  a  continual 
effort  and  tendency  to  reduce  and  consolidate  risks,  we  can 
never  expect  in  this  world  absolute  certainty,  and,  as  long  as 
risks  exist,  there  will  be  an  important  practical  distinction 
between  the  income  received  in  explicit  interest  and  rent  by 
such  persons  as  the  first  two  brothers  and  the  profits  and 
dividends  recdved  by  those  represented  by  the  last  two 
brothers.  The  former  will  always  receive  a  certain  and 
steady  but  small  income,  while  the  latter  will  receive  a  fluc- 
tuating but,  on  the  average,  a  relatively  large  income. 


CHAPTER  XXIV 


iMCQMB  rmoM.  lABOa 

§  z.  Similarity  of  Rent  and  Wagea 

We  have  seen  that  income  always  has  a  source,  and  that 
this  source  is  either  labor  or  capital,  or,  more  usually,  both 
jointly.  We  thus  have  two  great  agents  in  the  production 
of  income,  hbor  and  capital}  The  income  from  capital  we 
have  called  "rent."  The  UKmne  fxom  labor  u  called 
"  wages.'" 

Correqxmding  to  the  distinction  between  exj^dt  and 
implicit  rent,  we  may  distinguish  betweoi  explicit  and  im- 
plicit wages,  explicit  wages  being  wages  actually  paid  to  a 
hired  person,  called  the  employee,  by  the  person  hiring  him, 
called  the  employer ;  and  implicit  wages  being  the  eaminga 
of  a  person  who  does  not  sell  hk  services,  but  enjoys  them 
himself.  Such  a  person  we  have  already  called  an  enter- 
priser.* The  earnings  which  the  enterpriser  secures  (  so  far 
as  he  secures  them  1^  working  as  an  enterpriser)  are  caOed 
emkrffisei^s  profits. 

'  Ai  has  been  previously  stated,  "  coital "  is  used  in  this  book  to  Ibf 
dudeland.  Land  is  so  important  and  peculiar  a  kind  of  c^tal  thut  mm 
writers  i»efer  to  make  of  it  a  q>ecial  category  and  therefore  to  astlaguiM 
three  agents  of  production  —  labor,  land,  and  capital.  It  is  also  common 
to  restrict  the  term  "  capital "  still  further  by  excluding  goods  in  the  hands 
of  consumers  or  by  other  restrictions.  The  terminology  here  adopted  is 
believed  to  be  the  most  serviceable  and  also  to  conform  more  closely  than 
most  other  textbook  terminologies  to  the  usage  of  business  men. 

'The  term  "  wages "  is  bere  used  to  indude  thow  iorms  iSgBifinlM 
"  •ataries."  The  usual  dfatfawtkn  bstwwa  wifn  and  nhilii  ia  wtmHf 
one  irf  dagice,  and  hM  ao  adnitific  rignifirance. 

'Sometimes  die  Fmdi  tern  " ttOnpmmir"  b  used.  Tte  Eai^ 
•qoivaitnt  "  undertaker,"  in  the  sense  of  one  who  undertakes  an  enter- 
prfM,  was  formerly  in  vogue,  but  has  fallen  into  disuse,  perh^  because 
of  fts  special  i^plicatfatt  to  fnaanl  dbactoo. 

"  4M 


434    IXEmNTAXY  FBINCmES  OT  BOONOmCS   ICmtr.  XKPf 


The  income  of  a  community  may  therefore  be  classified 
into  rent  and  wages,  and  each  of  these  subdivided  into 
explicit  and  impUdt  classes.  We  thus  have  four  great 
branches  of  income — explicit  rent,  explicit  wages,  implicit 
rent  (or  capitalists'  profits),  and  implicit  wages  (or  enter- 
prisers' profits). 

Moreover,  since  the  income  included  imder  rent  (explicit 
or  implicit)  may  be  measured  with  reference  to  the  value  of 
the  capital  producing  this  income,  it  may  also,  as  we  have 
seen,  be  re^mied  as  interest  (explicit  or  implicit).^ 

Practically,  therefore,  we  may  divide  the  income  of  a 
communit;"  into  six  main  parts  sraiply  by  separating  out  from 
rent,  whether  explicit  or  implicit,  the  part  which  is  reckoned 
in  terms  of  the  value  of  capital,  i.e.,  that  part  which  is  in- 
terest, whether  explicit  or  implicit.  While  it  is  true  that  all 
rent  may  be  translated  into  interest,  only  part  of  rent  is,  in 
the  actual  world  of  business,  so  expressed.  We  therefore 
find  in  the  modem  worid  ax  great  branches  of  income  con- 
sidered in  reference  to  the  source  from  which  it  comes. 
These  are  commonly  called  wages  and  enterprisers'  profits, 
rent  and  capitalists'  profits,  interest  and  dividends.  The  first 
pair  are  measured  per  man,  the  next  pur  par  acre  <x  otba 
physical  irnit  of  capital,  and  the  last  pair  as  a  percentage  of 
capital-value.  All  six  branches  of  income  may  be  anaitged 
as  follows : '  -  - 

'  In  order  to  make  a  corresponding  measurement  of  wages, ».«.,  wages 
relatively  to  the  value  the  men  who  earn  them  we  should  need  to  ap- 
praise the  value  of  free  human  beings.  As  this  is  both  difficult  and  of 
little  practical  use,  it  will  here  be  disregarded. 

*  The  classification  of  income  here  given  comtpoaiiM  closely  to  that  of 
busiiKK.  men,  but  differs  somewhat  from  that  in  most  other  textbooks. 
A  very  common  textbook  classification  of  income  divides  it  into  rent, 
wages,  interest,  and  profits.  Of  these  four  terms  "  wages  "  is  generally  em- 
gloyed  in  the  same  sense  as  in  this  book.  But  the  terms  "  rent "  and 
J  profit"  are  in  many  books  emplo|red  in  other  sei.ses.  Ihus  the  term 
"  rent "  is  usually  restricted  by  economists  to  income  from  land.  It  ex- 
cludes, for  instance,  the  rent  of  houses.  The  term  "profiu"  Is  used  in 
many  different  senses,  but  is  often  restricted  to  enterprisers'  profits. 

The  student  of  economicB  needs  to  accustom  himsdl  to  ttudy  cudijfy 


Sac.  si 


niCOia  ROM  LABOK 


435 


EnucKT  iMPucrr 

mu^L  rx.jf»  1   I  Interest  per  cent    (Profits  per  cent  (dwidends) 
RoaiCaiiiUi  {Rent  pe,  .ere       iProfits  per  acre 
Vtam  Labor     Wafn  per  man      Pkofita  per  man 

The  principles  governing  the  rate  of  wages  are,  in  a  gea- 
enl  way,  dinilar  to  those  goyeming  the  rate  of  rent.  The 
rate  of  a  man's  wages  per  unit  of  time  is  the  product  of  the 
price  per  piece  of  the  work  he  turns  out  multiplied  by  his 
rate  of  output  in  that  time.  His  productivity  depends  on 
technical  conditions,  including  especially  his  size,  strength, 
skill,  and  devemess,  while  the  price  per  piece  of  his  services 
depends  upon  the  general  principles  of  supply  and  demand 
as  already  set  forth. 

The  i»oductivit|r  d  any  capital,  whether  human  or  ex- 
ternal, will  differ  with  the  capital.  Men  differ  in  quality, 
i.e.,  in  productive  power,  as  truly  as  lands  or  other  in- 
struments differ.  Some  men  have  a  high  degree  of  earning 
power  and  some  have  not.  Same  men  can  work  twice  as 
fast  as  others.  Some  men  can  do  higher  grades  of  work 
than  others.  The  result  is  that  we  find  men  classified  as 
conunon  manual  laborers,  skilled  manual  laborers,  common 
mental  workers,  siqierinteiKiiag  woricers,  and  enterprisers. 
Just  as  we  can  measure  the  rent  of  any  land  by  the  differ- 
ence in  productivity  between  that  and  the  low-rent,  or  no- 
rent,  land,  in  exactly  the  same  way  we  can  measure  the 
difference  in  productivity  betwem  mm.  There  is  no  grade 
of  workmen  called  the  "  no-wages  men,"  but  there  woidd 
be  such  a  grade  if  it  were  customary  for  their  employer  to 
pay  for  thdr  cost  of  support  (as  the  employer  of  land  pays 
for  its  cost),  so  that  only  the  excess  above  this  oust  were 
to  be  called  wages.  There  are,  indeed,  men  so  incompetent 
that  their  net  earning  power  is  nearly  zero,  and  they  can 

the  terminology  of  each  economic  writer.  Otherwise  the  conflict  among 
these  writers  and  the  discrepancy  between  most  of  their  ccoc^U  sad  tbs 
ussge  of  IwislMis  1MB  Bttjr  be  fMuid  wfiiiiin. 


436    MLMMMmJOLY  VBZMCDUt  Ot  BOOaiOIIICB   (Our.  XZIV 


barely  earn  enough  to  support  themselves.  These  incom- 
petents may  be  unfortunates,  as  in  the  case  of  invalids 
and  imbeciles,  or  blameworthy,  as  in  thfc  c  ,se  of  indolents. 
But  whatever  the  cause  may  be,  tLey  roughly  oonapand 
in  economic  analysis  to  no-rent  land. 

S  a.  Peodiaiilies  of  Labor  Sapfif 

But  owing  to  ty  fundamental  fact  that  a  laborer, 
unlike  any  othor  ;  .ummt,  is  owned  by  himself  and 
not,  except  in  r  .very,  by  another,  there  are  certain 
peculiarities  of  w£^es  as  compared  with  rent.  These 
peculiarities  lie  in  the  supply  curve.  We  shall  note  four 
of  these  peculiarities. 

In  the  first  place,  the  supply  ve  of  human  servicea 
ascends  very  rapidly  and  often  e\  '  curls  back,"  as  pre- 
viously explained  (Chapter  XVII,  §  3).  This  peculiarity, 
as  we  saw,  was  due  to  the  fact  that  a  man's  desire  for  more 
monfy  (marginal  desirability  of  money)  decreases  rapidly 
with  an  increase  of  his  earnings.  Beyund  a  certain  point 
the  more  he  is  paid,  the  less  he  will  work.  We  may  state 
the  same  fact  in  the  revnse  directimi,  and  say  tlutt  undor 
certain  circumstances  the  less  a  man  is  paid,  Uie  harder  ^ 
will  work.  The  shape  of  his  supply  curve  will  depena  • 
very  large  measure  on  whether  or  not  he  has  other  soma, 
of  income  beddes  his  work. 

Figure  47  exhibits  this  fact.  The  curve  SS'ST  represents 
the  supply  curve  of  work  for  a  well-to-do  or  rich  man  who 
has  income  from  other  sources  than  his  work,  and  the  curve 
that  fmr  a  poor  man,  who  has  to  depend  <m  idiat  he 
can  earn.  The  "  rich  "  man  represented  in  the  diagram 
will  not  work  at  all  for  any  wages  below  a  certain  price, 
say  $z  an  hour,  or  OS.  Any  price  above  this  will  induce 
him  to  work  a  Httte.  Thus  for  $x.30  an  hour  he  will  wmk 
about  two  hours;  for  $1.40  an  hour,  about  three  and  one 
half  hours;  and  for  $2  an  hour,  about  five  hours.    But  if 


8k.  si 


jgKOME  7R01C  LABOK 


437 


the  price  exceeds  a  certain  height,  S',  represented  m  the 
Sa^as  $2  an  hour,  the  result  will  be  that  he  wiU  woA 
less  rather  than  more.  These  relations  correspond  with  ob- 
served  facts.  A  milUonaire  will  not  work  for  a  d-iy  laborer  s 
wages.  He  may  work  a  few  days  in  the  year  for  Ixoo  a  day, 
and   work  more  y 


days  for  $500  a  ^ 
day,  but  $1000  a  apo 

day  may  lead  him 
to  workf  ewer  days, 
and  devote  more 
time  to  vacatkMM 
and  to  enjoying 
his  large  income. 

The  poor  man 
wm  be  guided  by 
gimilftr  considera- 
tions. His  curve 
will  be  lower  ver- 
tically, but  wider  . 
horizontally  —  if 
the  measure  of 
work  in  each  case 
b  in  hours  of  work. 


afio 
tpo 


s' 

- 

0' 

— 

1  •' 

— 

»  — 

>  — 

>  r 

hour* 

Fio.  47. 


Owning  little  or  nothing  besides  his 


person,  he  camiot  afford  to  be  idle.  Unemploym^t  ior 
Sm  is  seldom  voluntary.  So  long  as  he  an  grt  a  prta 
for  his  work  sufficient  to  keep  him  out  of  the  Poorhouse 
he  win  work  for  that  price.  Th^'  ^!  P?f 
which  is  necessary  to  induce  him  tow?*  j^^^^  W 
come  a  tramp  or  beggar  is  represented  m  ^ 
Os,  the  very  small  sum  of  ten  cents  an  hour  We  note 
thit  it  takes  only  a  relatively  sUght  ^fe  m  that  ^nce  to 

induce  him  to  work  a  full  day.  ^«  J^J^ 
sents  the  price  at  which  he  will  work  the  f«t«^ 

hours.  Above  this  he  wiD  pfefer  sHc  ^  y  shorter  ho^ 
A.  ibewty  stated,  it  is  ptobahte  th«A  the  dght-hour  move- 


438  SLxwanAiY  psinciples  of  economics  four.  XXIV 


ment  to-day  is  partly  due  to  the  fact  that  wages  are  high 
enough  to  enable  the  laborer  to  afford  some  leisiue  instead 
of  bdng  90  low  as  to  "  keep  his  nose  dose  to  the  grind* 

stone." 

A  reduction  in  wages  works  in  the  opposite  way,  making 
workmen  willing  to  work  longer  hours.  Only  when  the  price 
falls  much  bdow  the  dhow  at  /  will  they  refuse  longer  to 
endure  the  low  wages  and  long  hours.  They  will  thai  pre- 
fer, if  not  to  starve,  to  throw  themselves  upon  the  mercy  and 
charity  of  the  community.  The  general  level  of  the  curve 
between  the  dbow,  /,  and  the  beginning,  s,  represents  their 
minimum  Oandard  ofUrimg  which  th^  require  if  they  inA 
at  all. 

Now,  if  wages  keep  high  and  the  workmen  have  a  suffi- 
dently  low  degree  of  impatfence  for  income  to  enable  than 
to  accumulate  savings,  they  become  more  "  independent," 
which,  as  applied  to  their  supply  curve  ss's",  means  that 
it  shifts  a  little  toward  the  rich  maa's  supply  curve  S^ST, 
The  result  is  a  higher  minimnm  wage  necessary  to  induce 
the  laborer  to  work  and  a  smaller  maximum  number  of  hours 
which  he  is  willing  to  work.  The  intersection  with  the  de- 
mand curve  will  therefore  tend  to  be  higher  and  may  be 
farther  to  the  left;  that  is,  the  market  rate  of  wages  may 
be  higher  and  the  hours  worked  fewer. 

This  result  is  not  due  to  any  reduction  in  the  number  of 
wrakmen,  but  simply  to  a  reduction  m  their  intensity  of  de- 
sire far  money.  Savings,  therefore,  making  wmkmen  m<»e 
independent  and  less  necessitous,  will — by  lessening  thdr 
desire  for  money  — both  increase  thdr  wages  and  shorten 
their  hours. 

A  second  peculiarity  in  regard  to  wages  is  that,  arcq>t 
under  slavery,  the  earnings  of  a  laborer  are  seldom  dis^ 
counted  for  the  purpose  of  ascertaining  his  capital-value. 
Tte  reas(m  for  making  any  appraisement  usually  has  refer- 
ence to  some  proposed  sale ;  and,  as  wmking  men  and  wmnen 
ue  no  longer  for  sale,  thdr  capital-vahie  is  sddom  com* 


Saa4  IMOOIII  IMM  IAMB  439 

DUted.  For  this  reason,  wages,  unlike  rent,  are  J>oicim 
^garded  in  the  li^t  <rf  inteftrt  on  the  capital-vahie  tlie 

agents  earning  them.  „  j  j  *^ 

A  third  pecuUarity  of  wages  is  one  alrea  ly  aUuded  to, 
viz..  that  in  practice  they  are  always  redumed  as  groM  and 
neverasnet  Thb  is  because  the  wages  are  reckoned  from 
the  standpoint  of  the  employer  who  pays  them,  and  not  of 
the  laborer  who  receives  them.   Under  slavery  the  case  was 
different,  and  the  net  income  earned  by  a  slave  w«»  com- 
puted In  the  same  way  as  the  net  income  earned  by  a  horse 
-  by  deducting  from  the  value  of  the  work  done  the  cost  of 
supporting  the  slave.   But  under  the  system  of  free  labor 
which  now  prevails,  the  employer  has  no  sikA  cost  The 
laborer  assumes  his  own  support,  and  furmshes  only  his 
work  to  the  employer,    The  wages  of  the  laborer  arc 
therefore  reckoned  gross.    His  net  wages,  if  they  a«  to  be 
computed  at  aU,  are  to  be  found  by  •llowmg  for  the  irksome- 
Moi  his  work,  U.,  the  real  costs  which  he  bears  of  labor 
and  trouble.   At  the  margin for  the  last  umt  of 
work  done  -  this  cost  is,as  we  have  seen,  equal  to  ^e  wages 
received  for  it ;  but  on  aU  earlier  «nits  of  wwk  there  is  a 
sain  of  desiraWKty  which  might  conceivably  be  appraised  in 
Soney.  The  net  wages  thus  reckoned  wiU  be  only  a  part 
of  the  wages  as  ordinarily  quoted. 

When,  therefore,  we  compare  the  $500  a  year  wMcn  a 
workma^  gets  by  sdling  his  work  with  the  $500  a  year 
which  a  bondholder  gets  as  interest,  we  must  not  forget 
that  the  workman's  $500  is  really  less  variable  than  Ae 
bondholder's  $500,  and  for  two  r«sons  O"*  ^f^^ 
iust  Riven,  that  the  workman's  $500  is  obtained  only  by 
the  sweat  of  his  brow,  whUe  the  bondholder's  «  dm 
gain ;  the  other  reason  is  that  the  workman  s  $Soo  wiU  cewe 
at  hb  death  or  disablement,  wWle  the  bondhoWer»s  goes  oo 

^**Tfourth  pecuUarity  concerning  wages  is  that  the  si^jy 
of  wage  earners  differs  from  the  supply  of  any  other  mstra- 


440  nacBMTAiY  ramartMB  or  ■oomomici  (Quf^niV 


meat.  £xcq>t  in  slavery,  workmen  are  not  bred  like  cattle 
on  oommeidal  principles.  A  rise  in  the  price  of  the  serv- 
ices of  a  draft  horse  will  increase  the  demand  for  dnit 
horses,  and  the  result  will  be  that  both  the  market  price 
and  the  amount  supplied  at  that  price  will  be  increased. 
Those  wbo  supply  draft  horses  will  breed  them  to  take 
advantage  of  Uie  higher  i»ices  ci  them  and  their  services. 
A  rise  in  the  price  of  human  services  will  not  act  so  simfdy. 
It  is  true  that  a  rise  in  wages  usually  increases  the  number 
ot  marriages  and  often  increases  the  Mr  Ji  rate,  but  such  is 
not  always  or  necessarily  the  result ;  and  even  when  births 
do  increase  in  number,  they  do  not  increase  on  the  same 
conmierdal  principles  as  the  draft  horses.  It  is  an  excep- 
tional fathCT  who  can  think  or  say  as  did  a  cynical  old  farmer 
who  had  raised  a  large  family  and  thriftily  turned  their 
child  labor  to  early  account  for  his  own  benefit :  "  My 
children  have  been  the  best  crop  I  ever  raised."  Ordinarily 
parmts  view  their  diildren  not  as  potential  earning  power, 
but  as  objects  of  affection,  and  either  do  not  attenq[>t  to 
regulate  their  numbers,  or  do  so  with  reference  to  considera- 
tion for  their  own  or  their  children's  comfort.  The  prin- 
ciples which  regulate  the  number  of  Ifiborers  are  part  <^  the 
principles  regulating  population  in  genoal,  and  will  be  coo- 
sidoed  in  the  next  chapter. 

S  3.  The  Demand  for  Labor 

T\iming  now  from  the  supply  to  the  demand  side  of  the 
market,  we  find  that  the  demand  of  employers  for  the  serv- 
ices of  workmen  is  in  general  quite  analogous  to  their  de- 
mand for  the  services  of  land  or  of  any  other  productive 
agent.  Sentiment  and  humanity  have  a  little  influence, 
but  not  enough  to  require  special  attention  on  our  part. 
Wages  are  paid  the  ordinary  employer  as  the  equivalent 
of  the  discounted  future  benefits  which  the  laborer's  work 
win  bring  to  him  —  the  employer  —  and  the  rate  he  is 


sac.  si 


mooMS  ntoM  labok 


44X 


willing  to  pay  i»  equal  to  the  marginal  desirability  of  A« 
laborer'!  •ervfcet  mmmA  in  prwent  mo.iey.  We  wiih  to 
emphasize  the  fact  that  the  employer's  valuation  is  (i) 
marginal,  and  (2)  discounted.  The  employe  pay»  tor  afl 
his  workmen's  services  on  the  basis  of  the  lervicea  least  de- 
sinble  to  him,  jtMt  as  the  purchaser  of  coal  buys  it  all  on 
the  basis  of  the  ton  least  desirable  to  him ;  he  watches  the 
"  marginal "  benefits  he  gets  exacUy  as  does  the  pur- 
chaser of  coal.  At  a  given  rate  of  wages  he  *  b»r^  WKW 
up  to  the  pdnt  where  the  Ust  or  margina'        ^  work 
is  barely  worth  paying  for.  This  marginal  .     of  work 
is  a  sort  of  barometer  of  wages.  The  emp»^>er  s  pr^ 
lera  in  buying  labor  is  the  same  as  the  housdiolder's  prob- 
lem in  buying  coal  discussed  in  a  previous  chapter.  He 
is  constantly  balancing  in  his  mind  the  desirability  of  the 
work  of  his  employees  agains*  the  undesirability  of  the  wag» 
he  pays  for  that  work.  If,  say,  he  deckles  on  one  himdied 
men  as  the  immber  he  will  employ,  this  is  because  the  hun- 
dredth or  marginal  man  he  employs  is  believed  to  be  barely 
worth  his  wages,  while  the  man  just  beyond  this  margin,  the 
one  hundred  and  first  man,  is  not  taken  on  because  tte 
additioBal  work  he  would  do  is  bdieved  to  be  not  qtdt» 
worth  his  wages. 

Secondly,  wages  which  \  employer  pays  are  the  dts- 
counted  value  of  the  future  ioenefits  he  receives.  Thus,  the 
shefdwid  hired  by  ^.he  iarmer  to  tend  the  sheep  in  the  pas- 
ture rend,  -s  benefits  Iv.  value  of  whir'-  to  the  fanner  is  esti- 
mated in  prtdsely  the  same  way  as  the  value  of  the  benefits 
of  the  land  which  he  hires,  i.e.,  by  discounting  the  value 
of  the  future  yield  of  wool  or  other  benefits  toward  the 
production  of  which  the  shepherd's  work  contributes.  To 
take  another  example,  suppose  a  landowner  b  contemplat- 
ing the  planting  of  10,000  trees  which  he  bdieves  will  be 
mffth  as  lumber  in  twenty  years  about  $10,000,  or  orie 
dollar  per  tree  planted.  His  problem  is :  How  much  is  it 
worth  his  while  to  pay  per  tree  for  the  planting?  The 


11 


.  t. 


443     ELEMENTARY  PKINCIPLES  OT  ECONOMICS    [Cbaf.  XXIV 


answer  depends  on  the  rate  of  interest.  If  this  is  three 
and  a  half  per  cent,  it  is  worth  his  while  to  pay  50  cents 
per  tree  planted,  for  the  present  value  ($1  discounted  for 
twenty  years  at  three  and  a  half  per  coit)  is  $1  +  (i.oai)*, 
which  if  50  cents  (Chapter  VI,  §  4).  As  some  trees  may 
require  more  and  some  less  labor,  the  landowner  will  limit 
his  tree  planting  at  that  point  or  margin  where  the  cost  of 
the  labor  amounts  to  about  50  cents  per  tree.  It  fdlows 
that  wages,  like  roit,  are  dqpoidait  upon  the  rate  oi 
interest. 

Every  employer,  in  deciding  whether  his  workmen  are 
worthy  of  thdr  hu-e,  takes  accoimt  of  the  probable  future 
product  and  the  time  he  must  wait  for  it.  If  he  xmder- 
takes  to  put  up  a  sky  scraper,  he  discoimts  the  rent  he  ex- 
pects to  get  for  it  when  finished.  On  that  basis  he  decides 
whether  or  not  he  can  afford  to  build  it  at  currmt  wages, 
and  his  decision  will  tend  to  affect  those  wages.  The 
same  is  true  of  the  manufacturer  making  cloth  or  the 
organizers  of  a  railway  construction  company.  In  every 
case  the  employer  of  labor  must  discount  the  opected 
value  of  the  product  of  labor.  In  fact  an  employer  of 
labor  has  justly  been  called  a  "  labor-broker,"  paying 
present  cash  'or  work  which  leads  to  future  benefits. 

A  rise  in  the  rate  of  interest  will  tend  to  produtt  a  fall  in 
the  rate  of  wages  by  lowering  the  discounted  value  of  the 
final  benefits  from  the  work  of  laborers,  and  therefore  lower- 
ing the  prices  which  employers  are  willing  to  pay.  Con- 
trariwise, a  fall  in  interest  produces  a  rise  in  wages.  Thus 
if  the  rate  of  interest  in  the  case  of  the  landowner  planting 
trees  rises  from  three  and  a  half  per  cent  to  six  per  cent,  he 
can  no  longer  afford  to  pay  50  cents  per  tree  for  the  sake  of 
getting  back  a  dollar's  worth  oi  lumber  in  twenty  years; 
for  $1  discoxmted  at  six  per  cent  for  twenty  years  is  worth 
only  31  cents.  Consequently,  the  prospective  landowner 
will  dimini^  his  demand  for  tree  idanters,  and  their  wages 


SK.3I 


mocmM  wmcm  labok  443 


In  Chapter  VI,  §  5,  we  have  seen  that,  the  vahie  of 
capital  being  the  discounted  value  of  future  use*,  a  ite  or 
faUin  the  rate  of  interest  produces  a  fall  or  rise,  respectively, 
in  the  value  of  capital,  and  that  the  more  remote  the  future 
uses,  the  more  pronounced  is  the  effect  of  a  change  m  th0 
rate  of  interest. 

By  this  same  reasomng,  the  dependence  of  wages  on 
the  rate  of  interest  is  the  more  pronounced,  the  more  re- 
mote are  the  ultimate  benefits  to  which  the  woric  of  the 
laborer  leads.  In  a  community  where  the  workmen  are 
largely  employed  in  enterprises  requiring  a  long  tune,  such 
as  digging  tunnels  and  constructing  other  great  engm^ng 
works,  the  rate  of  wages  will  tend  to  fall  appreciably  with  a 
rise  in  the  rate  of  interest,  and  to  rise  appreaaWy  with  a  faU 
in  the  rate  of  interest;  whereas  in  a  country  where  the 
laborers  are  largely  engaged  in  personal  and  do^^^stic  semce 
or  in  other  work  which  is  not  far  distant  from  the  fin^ 
goal  of  enjoyable  benefits,  a  change  in  the  rate  of  Interest 
wDl  affect  the  rate  of  wages  but  slightly. 

Moreover,  a  change  in  interest  wiU  divert  laborers  fr^ 
one  employment  to  another.  K  interest  rises,  it  will  ^ 
labor  from  enterprises  ^ch  requiremudi  tmie  and  in  which, 
therefore,  the  hij^  interest  is  a  serious  consideration  and 
turn  it  into  enterprises  which  yield  more  immediate  booe- 
fits  For  example,  the  higher  the  rate  of  interest,  the  less 
relatively  wiU  laborers  be  employed  in  planting  slow-grow- 
fag  trees,  and  the  more  relatively  will  they  be  empbyed  as 
domestic  servants,  and  vice  versa. 

We  have  now  considered  the  supply  and  demandof 
labor,  or,  to  be  exact,  of  the  servk:«  <rf  laborers.  The 
rate  of  wages  fa  each  occupation  wQl  be  such  es  will  make 
the  supply  and  demand  equal,  i.e.,  will  clear  the  market 

One  corollary  of  the  principle  of  cleanng  the  n»*«j; 
appUed  to  labor  fa  that  unemptoyment  tends  to  correct 
itadi  In  the  particular  trades  in  which  unemployment 
may,  for  a  Ome,  odst,  the  rate  of  wages  wiU  tend  to  f aU. 


444    ELEMENTARY  PSINCIPLES  07  ECONOMICS    {Cbat.  XXIV 

The  M  in  wages  will  call  forth  an  increased  demand  for 
labor  which  will  tend  to  absorb  the  unemployed.  So  long 
as  any  unemployment  continues,  wages  will  tend  to  fall 
until  the  demand  for  labor  again  equals  the  supply.  It 
must,  of  course,  be  remembered,  however,  that  in  practice 
this  equalization  of  supply  and  demand  works  itself  out 
slowly  and  imperfectly.  No  market  is  a  perfect  market, 
least  (tf  all  the  labor  market.  For  instance,  the  reluctance 
of  a  laborer  to  change  his  residence  in  order  to  get  a  new 
job,  or  his  ignorance  of  the  existence  of  jobs  which  he 
might  have,  impedes  the  free  working  of  the  machinery  of 
supply  and  demand. 

What  has  been  said  applies  <»ily  to  wages  under  condi- 
tions of  competition.  Under  competition  they  are  deter- 
mined —  like  any  other  competitive  price— by  the  familiar 
pnndides  of  supply  and  demand.  If,  mstead  of  competition, 
we  have  conditions  of  more  or  less  perfect  monopoly, 
wages  will  be  determined  according  to  the  principle  of  mo- 
nopoly price  previously  e3q)lained  (Chapter  XVn,  §  9).  If 
tmpkiym  fom  combinations  called  busts, or  if  laborersform 
combinations  called  trade-unions,  there  will  be  an  effect  on 
the  rate  of  wages.  These  combmations  tend  to  render 
bargaming  collective  instead  of  competitive,  and  the  effects 
<m  the  two  ades  of  the  market  are  woriced  out  through 
struggles  called  strikes  and  lockouts.  But  the  r/wf^nntign 
of  these  subjects  belongs  to  applied  «»rftpAmi<ii. 

§  4>  Tbe  Efficiency  of  Labor 

We  have  seen  how  the  price  of  the  laborer's  services  is 
determined.  But  the  total  income  of  a  workingman  will 
depend  not  only  on  the  price  he  receives  for  each  unit  of 
work,  but  also  on  the  number  of  units  of  work  he  tuns 
out.  His  capacity  to  turn  out  work  is  called  his  efficiency. 
In  general  the  greater  the  efficiency  of  workingmen,  the 
greater  wiU  be  the  amount  of  real  inonne  they  recdve. 


SBC41 


mcouB  noH  labos  445 


This  is  perfectiy  obvious  in  the  case  of  impUdt  wag^,  and 
every  independent  worker  is  so  fuUy  aware  of  it  that 
is  constantiy  aiming  to  improve  his  own  effiaency.  THe 
fanner,  for  instance,  knows  that  the  more  work  he  can  accom- 
plish in  a  day,  the  greater  the  income  which  he  wiU  enjoy. 
The  more  wheat  he  can  gather  this  year  with  a  given  expen- 
diture  of  time  and  effort,  the  greater  wiU  be  this  year's  in- 
come. He  will,  therefore,  endeavor  to  gather  as  much 
wheat  as  possible  with  a  given  amount  of  effort,  or,  m  other 
words,  to  put  forth  as  Uttle  effort  as  possible  to  gatha  a 
certain  amount  of  wheat  The  more  he  can  reap  with  a 
Kiven  amount  of  effort,  the  greater  will  be  this  year  s  mcome 
bi  relation  to  the  cost  or  outgo ;  and  the  more  he  can  sow  with 
a  given  amount  of  effort,  the  greater  will  be  nest  yearns  m- 
come  in  relation  to  thfa  year's  outgo,  ffis  problem  is  always 
to  minimise  labor  and  to  maximize  the  product  of  labor, 
and  his  prosperity  depends  upon  his  so  doing. 

The  same  principle  appUes,  m  general,  to  wage  earner^ 
even  when  their  wages  are  expUdt,  since  the  Pfoducte  of 
their  labor  will,  to  a  great  extent,  be  consumed  byother 
laborers.   WhUe  the  interests  of  workmen  he  chiefly  m 
increased  wages,  these  wages  can  only  be  o^tf^e?. 
dering  adequate  services.   Wages  are  not  the  gift  the 
employers,  but  the  product  of  the  workmen  s  own  exertions 
Tbattempt  to  get  great  wages  without  rendermg  great 
services  in  return  is  to  fight  the  best  interests  of  those 
other  workmen  who  use  the  product   The  more  efficient 
the  hired  men  on  the  farms  in  the  West,  the  greater  will  be 
the  wheat  crop  and  the  more  abundant  and  therefore  cheaper 
will  be  the  bread  bought  by  the  employees  in  the  shoe  fac- 
tories in  the  East ;  just  as  the  more  efficient  the  employe^ 
in  the  shoe  factories  in  the  East,  the  more  abundant  and 
cheaper  will  be  shoes  for  the  farm  laborers  in  the  W^t 
It  is.  therefore,  to  the  best  interests  of  eadi  i^&itaian  that 
aU  other  workmen  should  produce  as  much,  and  as  eco- 
nomically, as  pos^   Moreover,  irtiUe  a  wofkman  may 


446    ELEMENTAHY  FKINCIPLES  OF  ECONOMICS  (Chaf.XXIV 


temporarily  injure  his  employer  by  a  poUcy  of  wastefulness, 
m  the  long  run  the  employer  will  largely  recoup  himself  for 
such  wastefdness  by  charging  higher  prices  for  his  products 
and  thereby  raising  the  general  cost  of  living.  Thus  in  the 
end  the  wasteful  woitEmaa  injures  himself  and  his  fellow- 
workmen. 

We  have  seen,  then,  that  for  the  ultimate  prosperity  of 
all  classes,  including  the  laborers  themselves,  it  is  of  the 
utmost  importance  that  workingmen  should  do  the  largest 
possible  amount  of  work  in  the  most  efficient  manner  id  a 
given  time.  The  efficiency  of  laborers  can  be  increased  in 
three  chief  ways:  first,  by  improvement  in  physical  and 
mental  vitaUty;  second,  by  improvement  in  trade  educa- 
tion; and  third,  by  improvement  in  organization  and 
division  of  labor. 

It  is  obvious  that  if  a  laborer  performs  his  tasks  under 

conditions  which  tend  to  impair  his  vitaUty,  there  will  be  a 
resulting  injury  to  his  prosperity  and  to  that  of  the  commu- 
nity of  which  he  forms  a  part.   The  public  is  beginning  to 
realize  that  there  are  many  factors  in  a  workingman's  Ufe 
which  tend  to  lower  his  vitality  and  thus  greatly  to  reduce 
his  earning  and  producing  powers.    §ome  of  these  factors 
are  due  to  his  personal  habits,  some  to  the  lack  of  proper 
pubUc  health  regulations  in  the  community  in  which  he  lives, 
and  still  others  to  certain  conditions  under  which  he  works! 
Among  the  personal  habits  which  are  very  harmful  to  the 
wage  earner  should  be  mentioned  the  use  of  alcoholic  bev- 
erages. As  employers  are  becoming  more  and  more  conscious 
of  this  fact,  they  are  beginning  to  require  temperance  and 
sometimes  total  abstinence  of  their  employees,  particularly 
when  those  employeef^  occupy  positions  which  make  them 
responsible  for  the  safety  of  property  and  of  Kves.   Sea  cap- 
tarns,  locomotive  engineers,  and  those  charged  with  convey- 
ing telegraphic  signals  are  often  required  to  be  total  abstain- 
ers, and  this  requirement  is  being  constantiy  extended  to 
other  dasaes  of  labor.  Wrong  haWts  of  diet  among  work- 


Sk.41  income  fkom  labor  447 

ingmen  axe  abo  often  the  cause  of  Impaired  vitaUty,  and 
consequentiy  of  impaired  efficiency.  Some  of  these,  such 
as  the  use  of  iU-balanced  rations  deficient  in  or  containing  an 
excessive  amount  of  tissue-building  elements,  are  the  result 
of  ignorance  on  the  part  of  the  workingman.  Others,  such 
as  the  use  of  injurious  foods,  Ukc  tuberculous  meat,  infected 
milk,  or  cami^^d  foods  containing  harmful  preservatives, 
while  due  in  part  to  the  ignorance  of  the  workingman,  are 
more  largely  due  to  the  failure  on  the  part  o,'  the  lawmak- 
ers of  a  community  to  enact  and  enforce  laws  which  shaU 
prevent  the  sale  of  such  foods. 

There  are  n^y  other  ways  in  wiadi  la^  o£  proper  laws 
and  regulations  in  a  community  endangers  the  health  of  the 
workingmen  of  that  community.  Among  these  is  exposure 
to  infection  from  those  having  infectious  diseases,  whether 
among  neighbors,  fellow-employees,  or  children  in  achooL 
Housing  conditions,  especially  as  to  ventUation,  are  partic- 
ularly objectionable  and  are  at  present  the  subject  of  much 
discussion  and  study  on  the  i»art  of  social  reformers.  A 
recent  investigation  has  shown  that  without  increasing  the 
expense  to  a  community  in  the  construction  of  houses  for 
working  people,  it  would  be  possible  to  secure  for  them 
sanitary  conditions  far  superior  to  those  which  they  now 

ordinarily  enjoy.  ,   .    i  v  > 

Still  oth«  causes  oi  the  impairment  of  the  laborers 
vitality  are  certain  conditions  under  which  he  works.  The 
fight  against  excc  sively  'ong  working  days,  which  is  being 
carried  on  both  by  workingmen  themsdves  and  by  others 
interested  in  their  welfare,  is  gradually  being  won.  R-peri- 
ments  in  reducing  the  hours  of  labor  from  t'  e  prf  '  aver- 
age of  about  ten  hours  a  day  to  nine  hours,  or  in  n  ^  yca'ies 
eight,  have  often  resulted  in  an  increased  productivity  no^ 
only  per  hour,  but  per  day.  We  are  stiU  suffering  from  the 
tradition  handed  down  from  the  days  of  slavery  when  often 
the  employer's  whole  effort  was  to  "  drive  "  his  employees  to 
the  utmost.  In  many  trades  to-day  an  ezaniiie  of  tms 


448    ELEUENTARY  PRINCIPLXS  OF  ECONOMICS  Kma.ZXPf 


dnving"  is  seen  in  fhe  "pace  maker"  or  fast  worker 
selected  for  his  ability  to  work  fast  and  employed  to  set 
a  rapid  pace  for  the  other  workmen.  As  laborers  vary 
greatly  in  the  rapidity  with  which  they  can  turn  out  work 
this  struggle  to  Hve  up  to  an  excessive  speed  standard, 
whfle  it  may  result  temporarily  in  an  increased  output  per 
man  per  day,  often  results  ultimately  in  producing  chronic 
diseases  and  in  injuring  the  health  of  the  men  in  other 
ways  to  such  an  extent  that  their  future  earning  capacity 
is  greatly  impaired.  Trade-unions  protest,  and  rightly, 
against  the  abuse  of  pace  making;  but  curiously  enough^ 
Ihey  strive  to  substitute  another  kind  of  inefficiency,  the 
go  easy  "  plan  of  purposely  redudn"  ou^ut.  Th^  do 
not  yet  realize  that  workmen's  proqierity  depends  on 
workmen's  efficiency. 

We  have  seen  how  the  efficiency  of  laborers  can  be  in- 
creased by  improvements  in  their  physical  vitality.  We 
shall  next  consider  how  it  may  be  increased  by  improvements 
in  trade  education.   When  the  apprendce  system  was  prev- 
alait,  a  long  technical  training  was  required  of  workmen 
entering  any  trade.  But  modem  division  of  labor  has 
reduced  the  amount  of  education  needed.  When  a  labor^s 
work  is  so  specialized  that  he  only  needs  to  make  one  or  two 
motions  — to  turn  a  crank,  or  push  a  lever,  or  feed  raw 
material  into  the  hopper  of  some  great  machine  — it  is 
clear  that  no  long  course  of  training  is  necessary.   A  week's 
or  a  month's  experience  suffices  to  fit  him  for  his  particular 
httle  job.   Consequentiy  the  apprentice  system  of  prepara- 
tion for  the  complet?  mastery  of  a  trade  has  faUen  into 
disuse.   Recently,  however,  a  reaction  has  manifested 
Itself  and  the  need  of  trade  education  has  been  felt.  With 
the  advent  of  intricate  machinery  —  of  electrical  apparatus 
m  particular  -  there  has  grown  a  need  of  a  great  number  of 
technically  trained  workmen.   This  need  is  being  supplied 
by  trade  schools  rather  than  by  the  old  system  of  shop 
e]q)erience  by  apprenticeship.   The  discussion  of  trade 


Sk.41 


DfcauB  ncm  labor 


449 


schools  does  not  belong  in  a  textbook  on  the  prindples 
o£  economics,  but  they  are  mentioned  as  indicating  one  of 
the  promising  methods  of  improving  workmca's  effidouy 
and,  therefore,  improving  their  condition. 

It  is  true  that  a  scarcity  of  trained  workmen  of  any  par- 
ticular sort,  such  as  electricians'  assistants,  will  tend  to  keep 
their  particular  wages  high,  and  that  a  greater  abundance 
of  such  workmen,  as  would  result  from  trade  schools,  would 
reduce  their  wages.  But  it  will  improve  the  condition  of 
the  newcomers  who  otherwise  would  have  been  compdled 
to  have  remained  unskilled  nnd  low-paid  workmen,  and, 
by  withdrawing  some  of  the  number  of  unskilled  workmen, 
it  will  tend  to  raise  the  wages  even  of  the  unskilled  workman. 
It  will  improve  the  general  average  for  all,  because  it  will 
increase  tltt  total  productivity  of  society. 

We  come  now  to  improvement  in  workingmen's  efficiency 
through  organization  and  division  of  labor.   In  the  earlier 
and  simpler  stages  of  division  of  labor,  an  individual 
workman  limited  himself  merely  to  a  single  trade.  Thus 
one  workman  becam"  a  tailor,  another  a  baker,  a  third  a 
snoemaker,  etc.   The  more  constantly  each  practices  at  his 
particular  trade,  the  greater  becomes  his  dexterity  in  that 
trade.  This  obviously  becomes  much  greater  than  that 
of  a  man  who  attempts  to  carry  on  several  different 
occupations.    "A  jack  at  all  trades  is  good  at  none." 
When  labor  becomes  still  more  minutely  subdivided 
so  that  the  wwk  of  one  individual  becomes  reduced  to 
(me  movement  or  group  of  movements  repeated  over  and 
over  again,  the  workman  not  only  becomes  more  skillful 
but  the  movement  gradually  becomes  almost  automatic. 
"Practice  makes  perfect."   Shoemaking  becomes  a  manu- 
facturing affair  consisting  of  dozens  of  separate  processes 
with  special  men  to  attend  to  each.   One  group  cut 
leather,  another  drive  pegs  or  sew,  etc.  Eves  these  opert^ 
ticms  ate  reduced  to  takling  madiinay  irtidi 
the  wofk. 


450    ELEMENTARY  PRINCIPLES  OF  ECONOMICS    [Chap.  XXIV 


Besides  dexterity  from  practice,  another  advantage  re- 
sulting from  division  of  labor  is  the  adaptation  of  work  to 
the  qualities  and  abilities  of  the  laborers.  This  is  especially 
true  in  the  case  of  mental  woiiLers.  If  a  man  who  has  ability 
for  leadership  turns  over  the  less  difficult  and  the  mechanical 
parts  to  subordinates,  devoting  himself  to  the  work  which  he 
alone  can  do  or  can  do  better  than  any  one  else,  he  becomes 
much  more  productive. 

Besides  personal  division  of  labor  there  is  geographical 
division  of  labor.  This,  as  indicated  in  Chapter  II,  §i,  iS 
partly  because  of  special  adaptation  of  certain  climates 
and  sdls  for  the  production  of  certain  crops,  partly  because 
of  the  location  of  mineral  deposits  and  water  power,  and 
partly  because  of  the  advantages  of  groupmg  establishments 
caitying  on  operations  of  a  related  kind.  Thus  Pittsburg  is 
an  inm  and  steel  producing  coiter  largely  because  of  its 
situation,  being  near  deposits  of  iron  and  coal. 

The  division  of  labor,  both  personal  and  geographical, 
means,  of  course,  that  the  persons  who  perform  the  various 
operaticms  of  a  certain  branch  of  industry  combine  — 
whether  consciously  or  unconsciously  —  to  bring  about  the 
final  result.  The  final  product  of  modem  industry  is 
peculiarly  a  joint  product  of  many  hands  and  minds  in 
many  different  parts  of  the  world. 

While  noting  the  advantages  which  result  from  division 
of  labor,  it  is  important  that  the  student  should  realize  an 
attendant  disadvantage  which  shoiild  be  understood  and 
overcame,  if  possible,  by  trade  education.  This  dis- 
advantage comes  about  through  the  fact  that  mere 
specialization,  while  it  fits  the  laborer  for  his  special 
task,  does  not  qualify  him  to  meet  the  requiremmts  of 
a  world  where  industrial  condition  are  raindly  changing. 
The  fact  that  specialization  prevents  a  workman  from 
being  able  to  cluinge  from  one  occupation  to  another  lies 
at  the  basis  of  the  complaints  i^;ain8t  labw-saving  madiin- 
eiy.  Probably  the  best  results  will  be  swured  by  com* 


Sac;  5l  nOOMB  fSOM  LABOR  4S< 

bining  spedal  trade  education  and  special  trade  experience 
on  the  one  hand,  and  general  educatioii  and  general  trade 
omerience  on  the  other.  The  more  the  laborer  can  have 
o£a  general  grammar  school  or  even  high  school  educa- 
tion, the  more  adaptable  he  will  be ;  and  if  at  any  time heto 
thrown  out  of  his  spedal  employment  by  dianges,  he  WD! 
have  len  difficulty  in  adapting  himself  to  the  new  employ- 
ment  which  this  change  almost  inevitably  brings  about. 

The  importance  of  general  education  for  the  workman 
is  widely  recognized,  but  it  is  not  yet  reallaed  that  a  certain 
amount  of  gmeral  experience  is  likewise  valuable,  li  em- 
ployers could  see  an  advantage  in  changing  the  tasks  among 
workmen  from  time  to  time,  it  is  probable  that  the  tempo- 
rary loss  from  such  changes  would  more  and  mote  be 
by  the  greater  intdHgence  and  efficiency  of  the  workmen 
which  would  result.  ,  ,  • 

The  full  discussion  of  the  methods  of  mcreasmg  efficient 
production  by  workmen  belongs  to  applied  economics,  and 
tf  tike  student  wishes  to  foUow  these  important  and  mterest- 
ing  subjects,  he  will  find  them  in  books  on  Labor  Laws,  the 
Housing  Problem,  PubUc  Health,  Hours  of  Labor,  Cauld  an^ 
Woman  Labor,  Technical  Education,  Factory  Samtatlon, 
Wo^men'a  Compensation,  Woritmen's  Insurance,  etc 

5  5.  The  "Make-Work"  Fallacy 

Hie  blindness  of  workmen  and  others  to  the  fact  that  the 
greater  the  effidencv  of  workingmen,  the  greater  theu:  own 
ultimate  prosperity,  is  sometunes  responsible  for  the  "  make- 
work  "  fallacy.  According  to  this  erroneous  beUef ,  the  wel- 
foie  of  workmen  depends,  not  on  their  productivity,  but 
on  thdr  having  jobs.  On  this  basis  they  advocate  gr^t 
pubUc  works  by  the  state  in  order  to  "make  work  for  tne 
unemployed.  According  to  thfe  philosophy,  a  ^owstorm 
biockadmg  a  dtyia  an  advantage  to  workmen,  as  It  makes 

HoA"  for  the  snow  shovelcrs.    H  we  carry  this  logic  a 


45>    UXMBNTAIY  PUMCIPLBS  OF  BCQNOMICS   [Chat.  XXIV 


Mttle  Iftrther,  we  should  have  to  conclude  that  it  would  be 
an  advantage  to  workingmen  to  destroy  the  houses  of  a 
community  in  order  to  make  work  for  carpenters ;  to  break 
windows  in  order  to  make  work  for  glaziers;  to  bi  .-n  up 
the  stock  of  the  clothier  and  the  shoe  dealer  to  make  work 
for  Ukmc  employed  in  tailoring  and  shoe  manufacturing; 
and  in  general  to  destroy  all  products  of  industry  in  order 
to  make  more  work  for  those  who  produce.  We  could  go 
even  farther  and  advocate  that  without  waiting  for  a  snow- 
storm to  blockade  the  streets,  a  city  could  benefit  its 
workmen  by  engaging  them  to  deliberately  obstruct  the 
street  with  dirt  and  then  to  shovel  it  away  again,  —  thus 
"making  work"  not  only  in  the  removal,  but  also  in 
the  placing  of  the  obstruction  in  the  street. 

The  make-work  fallacy  grows  out  of  n^ecting  the  goal 
at  which  work  is  aimed.    Work  is  not  pursued  for  its 
own  sake,  and  has  no  justification  except  as  it  fulfills 
actual  human  wants.   Mere  aimless  work  cannot  in  the 
end  benefit  workmen.   To  produce  things  merely  to  be 
destroyed,  or  to  shovel  dirt  back  and  forth  with  no  useful 
object,  will  in  the  end  reduce  and  not  add  to  the  real 
wages  of  workmgmen;  for  it  reduces  the  volume  of  the 
products  of  labor  which  constitute  the  real  wages.   If  shoes 
and  clot**    are  destroyed,  the  main  effect  will  be  not  to  in- 
crease wages  of  shoemakers  and  clothiers,  but  to  make 
woricmoi  in  genial  go  Hi-shod  and  ill-dothed.  To  break 
windows  or  to  destroy  houses  will,  as  its  main  effect,  not 
increase  the  wages  of  glaziers  and  carpenters,  but  decrease 
the  quantity  and  the  quality  of  shelter  which  workmen 
en^y.   No  matter  how  onnplicated  the  organization  of 
society,  we  cannot  get  rid  of  the  simple  fact  that  our  welfare 
depends  on  our  producing  the  largest  possible  output  at  the 
smallest  possible  cost,  thus  maximizing  the  final  satisfactions 
of  life  and  minimizing  the  ^ort  by  which  they  are  obtained. 
The  type  of  economic  production  may  be  pictured  by  Robin- 
son Crusoe  picking  berries.  He  will  not  try  to  "make  work" 


moons  flOK  LABOR 


453 


for  himself  by  destroying  the  berries  he  hu  picked ;  he  wffl 

not  try  to  limit  the  amount  of  berries  he  picks ;  he  will  enter- 
tain none  of  the  other  fallacies  which  in  modem  compUcated 
conditions  workmen  so  often  do  entertain.  He  wffl  limply 
try  to  pick  as  many  hemes  as  he  can  with  the  towt  unoimt 
of  effort  and  waste.   Modem  conditions  of  exchange  and  m- 
dustry  do  not  modify  this  essential  relaUon  between  satisfac- 
tions and  efforts.  They  do,  however,  obscure  the  relation 
and  as  a  result,  lead  to  the  make-worit  fallacy.  This  fallacy 
vitiates  a  great  deal  of  the  reasoning  employed  by  trade- 
unions  and  by  the  uninstructed  public.   It  is  very  analo- 
gous to  the  money  fallacies  which  have  been  prevkmsly 
discussed,  that  confuse  the  mere  medium  of  eichange  with 
the  goods  exchanged  thereby.    It  is  almost  as  cmde 
an  error  to  suppose  that  workmen  can  be  enriched  by 
"  making  work  "  for  them  as  that  they  can  be  enridaed  by 
issuing  paper  money.  Worit  and  money  are  merely  means 
to  an  end.   In  order  to  rid  ourselves  of  the  money  faUacy 
and  the  make-work  faUacy,  we  must  fix  our  attention  on 
the  end,  and  not  on  the  means. 

One  of  many  manif estetkms  of  the  make-work  faUacy  u 
the  prejudice  of  workmen  against  labor-saving  machinery. 
They  see  themselves  thrown  out  of  work  by  the  mtroduction 
of  a  labor-saving  device.  For  instance,  linotype  typeset- 
ting machines  threw  out  of  employment  many  professional 
typesetters  and  rendered  almost  worthless  their  skill  labori- 
ously acquired  through  years  of  practice.  But  it  tended 
to  increase  the  quantity  and  decrease  the  price  of  printed 
matter,  including  newspapers,  and  in  tiiis  way  to  benefit 
woikingmen  in  general.  Another  of  the  offsprings  of 
the  make-work  faUacy  is  the  poUcy  of  **  protecting "  a 
home  industry  against  foreign  competition.  Thus  the 
make-work  faHades,  like  the  money  faUacies,  have  been 
employed  in  aid  of  the  protective  faUacy.  Whatever  else 
of  good  may  be  said  in  favor  of  protection,  the  argument 
that  it  does  good  by  making  work  for  those  employed  in  the 


454    lUMIMTAlY  nOMCirUI  Ot  lOOMOllICi  fOMffvXXIV 

^  pioCected  induttiiet  is  laOadoot.  The  argument  is  quite 
analogous  to  the  argument  against  labornttviog  machinery. 
In  fact,  free  trade  may  be  thought  of  as  a  sort  of  Ubor- 
saving  machinery,  and  the  objections  to  free  trade,  which 
many  instiiictivdy  feel,  are  quite  analogous  to  the  objec- 
tkns  which  many  workmen  instinctively  fed  •gplf^^t  labor- 
saving  machinery.  According  to  this  argument  we  ought 
not  to  try  to  secure  goods  as  cheaply  as  possible  if  by  a 
greater  expenditure  of  effcvt  we  can  manitf*  '  ore  them  at 
home ;  for  this  home  manufactuifag  will  give  employment 
to  workmen.  According  to  this  argument,  instead  of  im- 
porting woolen  cloth  from  abroad,  it  is  better  to  protect 
wodoi  manufacturers  at  home  in  order  to  "  mafcy  work  " 
for  spinners,  weavers,  etc.,  in  American  woolen  mills.  Here 
again  we  come  in  contact  with  applied  economics,  and 
it  is  not  within  the  scope  of  this  book  to  discuss  at  length 
the  pros  and*  cons  of  protective  tariff  further  u  it 
illustrates  the  make-work  fallacy. 

The  reasoning  back  of  the  make-work  fallacy  has  been 
illustrated  by  supposing  that  a  farmer  drving  his  wagon 
to  market  should  convince  himself  that  to  put  sand  k  his 
axles  would  enable  him  to  get  to  market  faster.  He  might 
r«ison :  "  The  harder  the  horse  pulls,  the  faster  the  wagon 
will  go ;  if  I  put  sand  in  the  axles  the  horse  will  have  to 
pull  harder,  and  therefore  will  get  me  to  maricet  faster  I  ** 
To  "make  work"  is  to  put  sand  in  the  axle^  of  the  in- 
dustrial wagon.  It  makes  labor  pull  harder  without 
getting  on  any  faster.  What  we  need  is  to  grease  the 
axles  to  reduce  the  tffort  required  far  a  given  result. 
Then  with  the  same  effort  as  befwe,  or  even  less,  we  aiiaH 
get  a  greater  result. 

§  6.  Wages  ead  atterprisers*  Profits 

What  has  been  said  applies  to  income  received  through 
wages  in  general,  including  both  explicit  and  implicit  wages, 


mOOHB  nOK  LABM 


455 


but  implicit  wages  or  enterprisers'  profits  need  to  be  more 
particularly  considered.  Profiti  are  In  practice  iddoiiicafled 
waget;  for  the  term  "wages"  is  usually  employwl  In  the 
narrow  sense  of  explicit  or  stipulated  wages. 

The  peculiarity  of  profits  lies  in  the  element  of  rhance. 
Stipulated  wages  are  supposedly  certain,  while  profits  are, 
by  the  nature  of  the  caw,  uncertahi.  Many  a  worker  has 
the  option  of  hiring  out  to  wme  one  else  or  of  being  his 
own  employer.  In  the  former  caae  he  foregoes  the  chance 
of  gain  and  the  chance  of  loaa.  In  the  latter  caie  be 
aecuret  the  chance  of  gain  at  the  expense,  however,  of 
assuming  a  risk  of  loss.    As  a  consequence,  workmen 
classify  themselves  into   two   groups  — wage  camera 
or  employees  and  enterprfaeit  or  employera— entlrdy 
analogooe  to  the  two  groups  into  which  we  have  seen  that 
capitalists  classify  themselves;  namely,  bondholders  and 
stockholders.    And  just  as  the  bondholders  consist  of  those 
who  wish  to  avoid  chance  and  the  stocWwlders  of  those  who 
are  willing  to  assume  risks,  so  also  the  employees  are  those 
who  wish  to  avoid  chance  and  the  employers  those  who  are 
willmg  to  assume  risks.  And  just  as  the  itockholder  stan^ 
sponsor  to  the  bondholder  for  a  stipulated  mcome  from  capi- 
tal, so  the  employer  stands  sponsor  to  the  employee  for  a 
stipulated  part  of  the  income  ;om  labor  — or  usually  from 
labor  and  capital  jointly  considered.    This  is  a  consequence 
of  the  fact  that  those  become  enterprisers  who  beUeve  them- 
selves to  be  espedally  adapted  to  the  re^xmsftMUties  which 
their  position  involves. 

The  employee  or  recipient  of  explicit  wages  does  not 
usually  require  foresight  in  any  great  degree,  while  one  of 
the  chief  functions  of  the  profit  taker  or  enterpriser  is  to 
make  forecasts.  Again,  a  man,  in  order  to  be  an  employee, 
does  not  require  any  accumulation  of  capital,  while  an  ai- 
terpriser  b  far  better  equipped  for  his  position  if  he  is  the 
fortunate  possessor  of  a  considerable  fund  of  capital.  I' 
therefore  happens  that  while  theoreticaUy  an  enterprise 


45^    ELEHENTARY  ntlNCmiS  Ot  ECONOMICS    [Ceap.  XXIV 

may  have  little  or  no  capital,  practically  he  is  usually  a  capi- 
talfat  as  well  as  an  enterpriser. 

Profits  stand  in  a  double  relation  to  (explicit)  wages ;  for 
the  work  of  the  enterprisers  and  the  work  of  the  wage  earners 
are  to  some  extent  substitutes  and  to  some  extent  mutually 
complementary.  So  far  as  the  two  kinds  of  work  are  sub- 
stitutes for  each  other,  they  compete,  and  the  price  of  the  one 
tends  to  correspond  to  the  price  of  the  other.  If,  for  instance, 
wages  of  plumbers  go  down,  it  will  often  happen  that  a  few 
enterprising  plumbers,  rather  than  take  these  low  wages, 
will  set  up  for  themselves  as  independent  plumbers  and 
employ  other  plumbers  at  these  low  wages.  The  transfer 
of  these  men  from  the  ranks  of  the  employees  to  the 
ranks  of  the  employers  tends,  by  diminishing  the  supply 
of  plumber  employees,  to  raise  their  explicit  wages.  On 
the  other  hand,  by  increasmg  the  supply  of  plumber 
employers,  it  tends  to  diminish  the  implicit  wages  of  the 
latter;  in  other  words,  to  diminish  the  disparity  brought 
about  by  the  supposed  fall  in  plumbers'  (expKdt)  wages. 

If,  on  the  contrary,  the  wages  of  plumbers  rise,  it  will 
often  happen  that  the  same  or  other  men  will  move  back 
from  the  ranks  of  employers  to  the  /anks  of  employees. 
Finding  that  they  can  make  only  a  small  and  precarious 
living  as  employers,  either  because  there  is  too  much  com- 
petition among  the  independent  plumbers  or  because  of 
thdr  own  personal  shortcomings  or  misfortunes,  they  now 
prefer  to  accept  the  high  wages  which  plumbers  are  getting 
rather  than  to  continue  the  fight  any  longer. 

There  is  a  similar  competition  between  the  carpenter  em- 
ployer and  the  carpenter  employee ;  in  fact,  between  the 
"  boss"  and  the  "man"  in  every  trade  or  walk  of  life.  K  there 
were  no  difference  in  abilities,  there  would  be  a  tendency  for 
wages  and  profits  to  be  ahnost  equal,  although  there  would 
usually  be  a  slight  difference  in  favor  of  profits  owing  to  the 
fact  that  men  in  general  regard  uncertainty  as  an  evil  and 
require  higher  onnpensation  for  asnmdng  it  Jttst  as 


SB&6I 


INCOME  F&OM  LABOR 


457 


in  general  and  normally  a  stockholder  gets  a  higher  aver- 
age return  than  the  bondholder,  so  the  profit  taker  will  in 
general  and  on  the  average  get  a  higher  return  than  the  wages 
guaranteed  to  the  employee.  , 
But  in  actual  life  the  difference  in  superiority  of  profits  is 
still  further  increased  by  the  fact  that  the  enterprisers  form 
a  select  class.   While  almost  every  enterpriser  is  capable  of 
being  a  wage  earner,  not  every  wage  earner  is  capaUe 
of  being  an  enterpriser.  Therefore  the  supply  of  enter- 
prisers is  always  somewhat  restricted,  and  this  fact  tends 
to  elevate  their  profits.   Moreover,  enterprisers  are  also 
a  select  class  in  that  they  are  capitalists.  While  the 
possession  of  capital  is  not  always  an  absolutely  necessary 
qualification  for  becoming  an  enterpriser,  it  is  so  great  an 
advantage  as  very  materially  to  Umit  the  number  of  those 
best  equipped  to  be  employers.  While  the  possesalim  <rf 
capital  does  not  prevent  a  man  from  being  a  wage  earner, 
the  lack  of  it  tends  to  prevent  his  becoming  an  employer. 
This  still  further  limits  the  supply  of  employers  and  tends 
to  elevate  still  further  their  profits.  In  short,  the  employers 
or  enterprisers'  profits  tend  to  be  high  for  three  reasons: 
(i)  because  these  persons  assume  risks  and  responsibilities 
which  few  are  able  or  willing  to  take;  (2)  because  for  that 
very  reason  qualities  of  foresight,  courage,  and  exceptional 
ability,  which  few  possess,  are  required;  and  (3)  because  the 
work  of  the  enterpriser  usually  requires,  for  its  success  on 
a  large  scale,  the  possession  of  capital. 

Partly  as  a  consequwice  of  these  peculiarities  of  enter- 
prisers and  partly  because  of  the  general  conditions  of  mod- 
em industrial  organization,  the  relation  between  employers 
and  employees  is  not  altogether  or  even  generaUy  competi- 
tive, but  is  to  a  large  extent  complementary.  This  comple- 
mentary relationship  is  more  obvious  and  important  than  the 
competitive  relationship  just  described.  We  may  say  that,m 
general,  the  employer  and  the  employee  in  thesMnewtob- 
lishment  do  not  wiually  stand  to  cadi  other  in  »cooq>etitl¥e, 


4S8    ELEMENTARY  PRINCIPLES  OF  XCONCWICS    [Cbav.  XXIV 


but  rather  in  a  complementary,  relation.  The  iwjrk  of  each 
IS  necessary  for  the  efficient  work  of  the  other.  The  enter- 
priser could  not  accomplish  very  much  if  he  worked  merely 
byhmwdf;  he  requires  for  the  best  use  of  his  abiUties  a  large 
number  of  employees.  Omversdy,  the  employees  cannot 
receive  a  guaranteed  wage  unless  they  find  some  employer 
who  IS  willing  to  make  the  guarantee.  The  two  stand  in  a 
rdation  simikr  to  that  existing  between  any  two  comple- 
mentary coiTmiodities,  as,  for  instance,  the  relation  of  the 
engine  to  the  train  it  draws. 

To  the  extent  that  enterprisers  and  wage  earners  are 
complementary,  the  earnings  of  the  one  tend  to  move  not  in 
umson  with,  but  in  opposition  to,  the  earnings  of  the  other. 
■Die  lower  the  wages  of  the  employee  in  any  establishment, 
the  more  m  general  will  be  the  profits  of  the  employer,  and 
vice  vena.  We  see,  therefore,  that  the  relation  between 
the  employer  and  the  employee  is  a  complicated  one,  being 
partly  competitive  and  partly  complementary,  and  that 
therefore  their  interests,  though  partly  alUed,  are  largely 
opposed.  The  net  result  is  usually  that  profits  are  far 
greater  per  capita  than  wages. 

But,  while  this  is  true  of  the  average  rate  of  profits,  yn 
must  remember  that,  as  the  very  nature  of  profits  requires  an 
element  of  chance,  they  vary  enormously,  and  that  in  many 
mstances  the  individual  enterpriser  may  make  less  than  the 
wage  earner,  or  even  less  than  nothing  at  all,  wMk  in  other 
extreme  cases  he  may  make  his  fortune. 


S  7-  Profits  ivad  Ofttrlbntfon  Oenenlly 

Hitherto  we  have  spoken  separately  of  the  capitaUst  who 
fa  a  profit-taker  and  of  the  employer  ^o  b  a  profit-taker, 
but,  as  has  been  indicated,  often  one  and  the  mat  penon 
isboth  capitaUst  and  enterpriser.  In  fact  those  who  re- 
cdye  profits  as  employers  of  labor  usually  receive  profits 
m  from  c^tal  wtidi  they  own,  although  the  converse 


Sa&il 


wcoMX  num  labor 


459 


is  not  80  univeraaBy  tree.   Those  lidio  wlah  to  receive 

income  through  their  capital  without  any  work  become 
bondholders  rather  than  stockholders;  while  those  who 
wish  to  get  income  from  their  work  without  investing 
(or  perhaps  even  poBaessing)  capital  prefer  to  work  for 
wages  or  salaries.  H  a  man  wishes  to  become  a  stock- 
holder, he  usually  is  actively  interested  enough  to  do  a 
certain  amount  of  work,  if  it  is  no  mote  than  investigatmg 
the  relative  prospects  of  different  companies  offering  chances 
for  investors.  And  it  is  still  truer  that  those  who  wish  to 
take  the  responsibiUty  of  conducting  an  enterprise  wish  not 
only  to  put  their  effort  into  it,  but  their  capital  also. 

It  thus  usually  happens  that  the  profits  which  a  man 
receives  cannot  be  easily  classified  into  profits  from  his 
capital  and  profits  from  his  own  exertions.   Generally  his 
profits  are  the  joint  product  of  both  his  labor  and  his  capital, 
The  profit-takers— who  are,  of  course,  also  loss-takers— are, 
then,  the  risk-takers  of  society.    Some  men  risk  only  their 
capital  (and  receive  dividends  per  cent  or  profits  per  umt 
of  physical  capital  according  to  the  fwrn  of  tlwir  invest- 
ment), others  risk  their  own  labor  (and  receive  earmngs 
of  management),  while  most  risk  both  their  capital  and 
their  labor  and  receive  thr  joint  earnings  of  their  capital 
and  labor.    These  enterpiiser-capitalists  arc  well  called 
the  "  captains  of  industry."    They  take  the  initiative  in 
enterprises  of  aU  sorts,  and  on  their  judgment  will  depend 
whether  not  only  their  own  capita'  and  labor,  but  the 
capital  and  labor  of  others  (to  whom  they  undertake  to 
pay  st^mlated  interest  or  rent,  on  the  one  hand,  and  wages 
on  the  other),  shall  be  economically  or  wastefully  employed. 
When  their  leadership  proves  wise  they  make  large  profits 
for  themselves,  but  these  may  be  said  to  be  a  well-deserved 
reward  for  the  general  good  their  sagadty  brings  the  pub- 
lic.   When  their  leadership  proves  unwise,  they  suffer  a 
loss,  and  this  may  be  said  to  be  a  deserved  penalty  for 
wasting  the  capital  and  labor  d  society.   The  men, 


460    ELEIIENTAKY  PUMCIPLES  OF  ECONOMICS   [Chaf.  XXIV 


Commodore  Vanderbilt,  who  have  built  railways  which 
were  needed,  have  made  fortunes.  Those  who  have  built 
railways  which  had  to  be  abandoned  have  lost  fortxmes. 
There  is,  then,  to  some  extent,  a  justification  of  our  sys- 
tem by  which  we  put  a  premium  on  enterprises  which  turn 
out  well  for  society  and  a  penalty  on  those  which  turn 
out  ill. 

It  is,  however,  also  true  that  just  as  there  are  types  of 
successful  speculators  which  should  be  condemned,  so  thei« 
are  types  of  successful  enterprisers  which  should  be  con- 
demned. Those  clever  promoters  who  gain  at  the  expense 
of  the  public  through  the  frauds  of  "  high  finance  "  are 
among  the  worst  forms  of  public  enemies. 

The  enterpriser-capitalist  then  is  the  lutding  figure  m 
modem  industry.  He  gathers  round  him  other  capitalists 
and  laborers  and  jointly  they  produce  the  income  of 
society.  After  paying  them  the  parts  <rf  this  income 
agreed  upon,  he  takes  for  himself  whatever  may  be  left, 
large  or  small  as  the  case  may  be.  Their  parts  are  the 
earnings  of  capital  (in  the  two  forms  of  rent  and  interest) 
and  the  earnings  of  labor  (in  the  form  of  wages).  His 
own  part  is  the  earnings  of  his  own  capital  and  labor  (in 
the  form  of  profits  jointly  on  his  capital — whether  meas- 
ured per  cent  or  per  unit  of  physical  capital — and  on  his 
own  labor). 

We  cannot  too  much  emphasize  the  fact  that  though 
each  of  the  various  laborers  (both  employers  and  employees) 
and  instruments  of  capital  (land  and  other  instruments) 
which  jointly  produce  income,  is  credited  with  a  certain 
part,  it  could  not  produce  this  part  alone,  or  by  itself.  The 
earnings  of  a  railway  company  are  due,  for  instance,  to  the 
jdnt  services  of  the  stockholden,  bondholders,  officers,  em- 
ployees, locomotives,  cars,  roadbed,  and  terminals.  These  are 
not  independent,  but  mutually  complementary,  instruments 
and  laborers,  and  their  services  are  complementary  services. 
We  impute  to  eadi  a  certain  part,  determined  according  to 


Sec.  7] 


wcom  noM  labos 


46t 


the  princ^  which  legulftte  the  prices  of  complementary 

goods. 

The  sum  of  all  these  items— that  is,  all  the  interest,  icnt, 
wages,  and  profits,  in  any  community  in  any  given  period 
of  time  is,  of  course,  the  total  income  of  that  community. 
An  inventory  of  these  would  show  what  quota  was  •  ontrib- 
uted  to  this  total  by  or  imputed  to  human  beings,  land, 
and  other  instruments.  As  a  matter  of  fact  by  far  the  larger 
part  is  contributed  by  human  bemgs.  Professor  Nicholson 
of  Edinburgh  has  estimated  that  the  income  from  what  he 
calls  "the  Uving  capital"  of  Great  Britain  is  five  times  as 
great  as  that  from  the  "  dead  capital."  In  less  wealthy 
countries  the  preponderance  of  man-produced  income  is 
probably  still  larger.  Of  the  part  produced  by  "dead 
capital"  the  larger  portkm  is  from  land. 

In  a  new  country  the  rent  of  land  is  apt  to  be  low,  but  rent 
of  other  things  and  wages  high.  For  in  such  a  country  land 
is  abundant,  but  other  forms  of  capital,  including  laborers, 
relatively  scarce.  As  a  country  grows  okte  and  more 
populous,  land  becomes  scarce  relatively  to  population,  or, 
in  other  words,  the  demand  for  land  increases  without  any 
increase  in  supply.  Therefore  land  rent  tends  to  rise,  and 
other  rents  and  wf^  to  faD. 

Progress  in  scientific  knowledge  causing  an  mcrease  m 
productivity  of  land  is  like  the  rejuvenation  of  a  country. 
Any  increase  in  general  productivities,  whether  of  land  or  ^ 
otiier  agents  of  production,  has  a  tendency  to  make  tiie  rafe  of 
wages  increase.  For  (i)  by  increasing  the  wealth  of  employers 
and  thereby  diminishing  the  marginal  desirability  of  money, 
there  b  a  tendency  to  increase  their  demand  for  everything, 
including  the  services  of  woAmen ;  and  (a)  so  far  as  work- 
men thonselves  are  owners  of  houses,  implements,  and  other 
instruments  of  any  kind,  and  thus  share  in  the  increased 
affluence,  the  supply  of  work  they  offer  is  decreased,  as  we 
have  seal. 

Such  a  result  is  proiMfaiy  the  diief  general  effect  of  »• 


462    VLBMEHTARM  PSINCIPLES  Of  ECONOMICS  [Cbat.XXIV 


called  labor-saving  machinery.   It  increases  the  ircome  of 
other  classes  than  laborers,  and  with  it  their  power  to  buy 
work  of  laborers.  The  first  effect,  however,  is  for  the  labor- 
saving  machine  to  displace  laborers,  with  whidi,  in  fact, 
it  is  a  competing  article,  and  we  have  seen  that  the  in- 
crease in  one  of  two  competing  articles  or  substitutes  tends  to 
lower  the  price  of  the  other.  The  individual  laborers  thus 
di^I^aced  are  likely  to  be  injured  by  the  improvement, 
being  unable  to  learn  another  trade  without  undue  loss  of 
time.   It  is  even  conceivable  that  labor-saving  machinery 
might  become  so  automatic  and  so  fully  a  substitute  for 
human  work  that  there  would  be  no  need  and  »>  demand 
for  such  work.   But  such  an  effect  seems  very  improbable. 
The  human  machine  is  so  much  more  versatile  than  other 
machines  that  its  relation  as  substitute  for  labor-saving 
machines  is  not  so  important  as  its  comfdementaiy  rdaticm 
to  them.   As  a  matter  of  history,  so-called  labor-saving 
machinery,  while  it  "  saves  "  or  displaces  laborers  from  one 
sort  of  work,  often,  if  not  usually,  produces  new  needs  for 
them  in  another  sort  of  work.   If  horses  and  carriages  were 
introduced  into  China,  they  would  largely  dispense  with  the 
need  of  coolies,  who  now  carry  passengers  in  sedan  chairs, 
but  they  would  caU  for  coachmen  and  grooms.  When,  in 
turn,  stagecoaches  give  place  to  railways,  the  trade  of  driven 
of  stagecoaches  becomes  obsolete,  but  the  new  trades  of 
locomotive  engineers,  firemen,  conductors,  and  brakemen 
are  created.  In  fact,  the  very  names  of  t  le  •  occupations, 
as  of  hundreds  of  others,  show  tb-/'  the  cen  a  id  for  these 
kinds  of  work  arises  from  the  t   itence       ,   Winery.  In 
other  words,  while  labor-saving  machin  i>  is  always,  as 
its  name  implies,  a  competing  article  with  the  human 
machine  with  respect  to  some  of  the  many-sided  ^^pwHtiffi 
of  a  human  being,  it     usually  also  a  complemerUary  article 
with  respect  to  some  other  capacity;  and  we  have  seen 
that  an  increase  in  the  quantity  of  one  of  two  comph- 
mmtary  articles  tends  to  iiicnase  the  price  of  the  other. 


8k.  7l 


mcoMB  wwom  labok 


463 


In  the  present  chapter  as  in  the  preceding,  we  have  con- 
sidered income  as  distributed  among  the  agents  which  pro- 
duce it, —labor  and  capital,  including  land.  We  are  now 
ready  to  turn  to  the  other  sort  of  distribution,— the  distri- 
bution among  the  owners.  A  decrease  in  the  amount 
of  capital  which  laborers  own  will,  as  we  have  ahready  sera, 
make  them  willing  to  take  lower  wages  than  otherwise. 
In  fact,  the  chief  reason  that  there  exists  a  wage  class  b 
that  those  constituting  it  have  little  or  no  capital  apart 
from  their  own  persons.  Wage  earners  are  chiefly  "  prop- 
otyless  "  persons  —  persons  who  have  either  never  had 
any  property,  or  have  lost  what  they  did  have,  as,  for 
instance,  throu^  too  high  a  degree  of  impatience.  We 
see,  therefore,  that  the  question  of  wages  depends,  among 
other  things,  on  the  distribution  of  the  ownership  of  wealth. 
This  will  be  the  subject  of  the  next  chapter. 


CHAPTER  XXV 


WIALTH  AND  POVSKTY 

S  I.  The  Problems  of  Wealth  and  Poverty 

The  first  half  of  our  study  of  distribution  has  been  pre- 
wmted  in  the  two  last  chapters.   It  dealt  with  the  dis- 
tnbution  of  income  relatively  to  the  agents  or  instruments 
which  produce  that  income.   In  the  present  chapter  we 
shall  take  up  the  second  half  of  the  study  -  i.e.,  the  dis- 
tribution of  this  same  income  relatively  to  tiiose  who  own 
and  enjoy  it.   The  two  sorts  of  distribution  are  quite  dif- 
ferent, altiiough  there  has  been  a  tendency  to  conf  hem 
This  was  natural,  for  in  tiie  early  days  of  econom  ople 
were  classified  roughly  according  to  tiie  sort  of  insa  oments 
they  owned.    There  was  the  landlord  class,  whose  chief 
income  was  ground  rent;  the  non-landed  capitaUst,  whose 
cluef  mcome  was  from  other  capital  than  land;  and  tiie 
laborer,  whose  chief  income  was  wages.    It  was  tiien 
natural  to  imagine  that  tiie  incomes  produced  by  laborers 
by  land,  and  by  other  capital,  were   Iso  tiie  incomes  en- 
pyed  by  laborers,  by  landlords,  and  by  other  capitaUsts. 
But  even  were  such  a  classification  possible  and  duly 
made,  it  would  still  fail  to  teU  us  anything  ^tever  as  to 
how  large  was  the  per  capita  share  witiiin  each  class,  or 
whetiier  tiie  amounts  enjoyed  by  diflferent  individuals 
were  or  were  not  very  unequal.   The  best  we  could  say 
would  be  that  certain  land  yields  a  rent  of  $io  an  acre 
and  otiier  lands  more  or  less  than  this ;  that  certain  housed 
rent  for  $1000  a  year,  and  others  for  more  or  less;  tiiat 

464 


Sic.ll 


WEALTH  AND  POVKKTY 


465 


moaey  tenctert  make  five  per  cent  on  their  loans ;  and  that 
ordinary  wage  earners  get  $2  a  day.  But  these  data,  how- 
ever detailed,  would  not  tell  us  the  relative  income  enjoyed 
by  different  persons,  except  in  the  case  of  the  common  laborer, 
and  then  only  on  the  assumption  that  he  derived  no  income 
from  any  other  source  than  from  his  work.  Furthermore, 
to-day  there  are  only  small  traces  left  of  the  old  social  strati- 
fication, and  correspondingly  little  excuse  for  confusing  the 
distribution  of  income  with  reference  to  the  capital  which 
yields  it  and  ite  distribution  with  reference  to  the  persons 
who  own  it. 

But,  though  the  two  sorts  of  distribution  are  distinct, 
each  is  needed  to  understand  the  other.  The  problems  now 
before  us  —  of  distribution  relatively  to  owners  —  may  be 
described  as  the  problems  of  the  total  income  of  a  nation, 
of  the  average  income  of  its  inhaUtants,  and  of  tbe  rdar 
tive  numbers  of  people  owning  incomes  of  various  sizes. 

The  last-named  problem  is  the  problem  of  grading  the 
population  according  to  income  —  the  problem  of  discrim- 
inating the  relatively  rich  and  the  rdativdy  porar.  No 
other  i»d)lem  in  economics  has  so  great  a  htunan  interest 
as  this,  and  yet  scarcely  any  other  problem  has  received  so 
little  scientific  study.  Since  income  necessarily  comes  from 
cai»tal  or  from  labor,  the  problem  of  "distribution"  of 
income  is  largely  that  of  the  "distribution"  of  capitaL 
Our  problem  may  therefore  be  stated  in  two  ways :  either 
as  the  problem  of  the  personal  distribution  of  income  or  as 
the  problem  of  the  personal  distributioii  of  catfittl  and  of 
labor-power.  It  is  what  is  popularty  known  as  tibe  proUem 
of  *'  the  distribution  of  wealth." 

For  the  purpose  of  comparing  the  incomes  or  capitals  of 
different  persons  or  nations,  values  are  more  important  than 
quantities.  If  we  know  that  A's  income  is  worth  $1000  a 
year  and  B's,  $10,000,  we  may  say  that  B's  income  is  ten 
times  A's  in  the  sense  that  the  elements  composing  B's 
mcome  are  worth  in  exchange  ten  times  the  elements  own- 
11 


466  xuaoEMTAxy  niNcmBS  or  bcomomics   icm*.  xxv 


posing  A's  income ;  or,  if  we  know  that  X  is  "  worth  " 
(».«.,  owns  capital  worth)  $1,000,000  and  that  Y  is  "  worth  " 
$10,000,000,  we  may  say  in  like  lenie  that  Y's  capital  is 
tenfold  X's. 

In  order  to  compare  the  incomes  or  capitals  of  widely 
distant  times  or  places,  a  correction  may  need  to  be  made 
for  di£faencei  in  the  purchasing  power  of  money,  and  if  the 
rate  of  interest  is  also  different  in  the  two  cases,  the  result 
of  the  comparison  will  not  necessarily  be  the  same  for  the 
capital  as  for  tlie  income.  A  millionaire  worth  $1,000,000 
in  California  half  a  century  ago,  the  rate  of  interest  being 
twelve  per  cent,  commanded  an  income  equivalent  to  that 
of  a  multimillionaire  to-day,  worth  $3,000,000 ;  for  the  pres- 
ent rate  of  interest  is  only  one  third  as  high.   If,  therefore, 
we  were  to  compare  the  possessor  at  that  time  of  $1 ,000,000, 
having  an  income  of  $120,000,  with  the  poaessor  now 
of  $2,000,000  having  an  income  of  $80,000,  we  should 
have  to  say  that  though  the  first  was  only  half  as  rich  in 
capm  as  the  second  he  was  fifty  per  cent  richer  m  income. 
Another  point  of  difference  between  comparisons  of  capital- 
value  and  comparisons  of  income-value  lies  in  :he  fact  that 
while  capital-values  differ  only  in  size,  income-values  differ 
also  in  distributimi  in  time  as  well  as  in  certainty.  For 
this  reason  a  man  rich  in  lands  from  which  there  hiqjpens 
to  be  Uttle  immediate  income  —  but  only  prospects  of 
income  in  the  distant  future  —  is  sometimes  called  "  land 
poor,"  having  much  land,  but  Uttle  inunediate  income. 

But  when  we  are  seeking  to  compare  the  absolute  com- 
forts which  different  persons  or  nations  enjoy,  it  is  more 
important  to  consider  quantities  than  values.  In  fact,  as 
noted  at  the  outset  of  our  study,  mon^  vahuitions  are 
apt  to  be  misleading.  A  country  where  water  is  scarce 
will  put  a  higher  money  valuation  on  its  wa^er  supply  than 
a  country  where  water  is  so  abundant  as  to  have  no  price. 
Thus,  a  large  quantity  of  water  shows  more  affluence  in  the 
sense  of  "  desirability  "  than  does  a  huge  vahie  of  water. 


Sac.  al 


WXALTH  AND  POVUTY 


4«7 


Practically,  however,  if  we  confine  our  attention  to 
modem  times  and  conditions  in  western  Europe  and 
America,  it  is  true,  in  a  general  way,  tlut  of  two  nations  or 
individuab  the  one  which  b  ridier  in  capital-goods  it  richer 

also  in  income-goods,  in  income-value,  and  in  capital-value. 
For  simplicity  we  shall  hereafter  assume  that  these  four 
comparisons  are  thus  similar.  We  may  say  that  a  man  is 
"  ridi "  if  he  has  a  large  amount  of  capitaH(oods  <A  various 
kinds  —  lands,  houses,  stocks,  bonds,  etc.;  or  a  large 
money-value  of  such  goods ;  or  a  large  amount  of  benefits 
of  various  kinds  —  nourishment,  clothing,  shelter,  amuse- 
ments, etc. ;  or  a  large  money-value  of  sticfa  benefits.  A 
man  b  "poor"  if  he  has  small  amounts  of  all  these  things. 

Of  course,  the  two  terms  "  rich  "  and  "  poor"  are  purely 
relative,  and  represent  no  deeper  scientific  meaning.  A  man 
who  is  ridi  according  to  one  standard  may  be  pom  tccotd- 
ing  to  nother.  But  the  two  terms  are  very  convenient  to 
designate  relative  conditions.  Corresponding  to  the  ad- 
jectives "  ri'  I "  and  "  poor  '  are  the  nouns  "  wealth  " 
and  "  poverty  " ;  for,  as  noted  in  the  first  chi4>ter,  the  tenn 
"  wealth  "  is  especially  used  to  indicate  a  large  amount  of 
wealth,  just  as  the  term  "poverty"  is  used  to  indicate 
a  smaJl  amount.  Our  subject,  Uien,  in  this  daaptet  is 
conqiarative  wealth  and  poverty,  both  of  nationt  and  of 
individttals. 

S  2.  National  Wealth  or  Poverty 

We  may  divide  this  subject  into  two  heads:  the 
wealth  or  poverty  of  nations  and  the  wealth  or  poverty 
of  mdividuals.  We  shall  first  consider  the  wealth  or  pov- 
erty of  nations. 

"The  wealth  of  nations"  depends  upon  two  things: 
their  labor  and  their  capital,  including  thdr  lands  and 
the  other  capital  the  people  have  prodtuxd.  The  ino(«ne 
earned  by      people  oi  a  nation  always  far  esEoeeds  the 


468    SUMINIARY  PSINCIPUE8  Of  BC0N0MIC8    (Qmv.  XXV 

income  earned  by  all  its  capital.  Yet  peoi^  do  not  earn 
income  without  at  least  land.  Given  laborers  and  land, 
we  have  the  only  two  real  requisites  of  producing  income. 
Other  ci^tal  q>rings  from  thoe  two.  It  b  amnetimes  uAA 
that  labor  is  the  father,  land  the  mother,  and  the  other  kinds 
of  capital  the  children.  A  nation,  then,  is  the  richer,  the 
larger  the  number  of  its  inhabitants,  the  greater  the  extent 
of  its  territory,  and  the  greater  the  amcwBt  of  its  accumu- 
lated products. 

These  three  factors  depend  each  on  somewhat  different 
conditfoos.  The  amount  of  land  and  its  power  to  pro- 
duce is  largely  a  question  of  natural  resources.  It  may 
be  taken  as  a  given  quantity  presented  to  man  by  natm*. 
It  is  now  becoming  recognized,  however,  that  land  is  not 
so  definitdy  constant  m  its  power  to  produce  as  was  once 
imagined.  Ootoi  the  most  important  results  of  the  recent 
"conservation  movement"  in  this  country  has  been  to  show 
conclusively  that  land  is  not  altogether  a  constant  source 
of  income,  but  that  it  is  possible  by  the  impoverishing  and 
washing  away  of  top  soil  greatly  to  impair  or  destroy  ab- 
solutely the  productivity  of  land ;  wliile,  on  the  contrary, 
by  proper  fertilization,  keeping  land  fallow,  rotation  of 
crq»,  etc.,  it  is  possible  to  increase  the  efficiency  of  land 
ju^t  as  it  is  possible  to  increase  the  efficiency  of  other 
instruments. 

The  dominion  over  land  by  any  given  group  of  men 
may  depend  on  wresting  it  by  military  force  from  another 
group.  In  fact,  one  of  the  chief  objects  of  war  has  been  to 
increase  national  wealth  by  adding  to  territory.  This  was 
r.  chief  object  of  the  Roman  Empire  and  of  the  colonial 
system  of  Great  Britain.  These  and  other  nations  have 
had  what  is  called  "  earth  hunger."  The  wealth  of  the 
British  Empire  to-day  lies  for  the  most  part  outside  of  the 
British  Isles ;  for  it  includes,  besides  England,  a  number  of 
inqwrtant  colonies  —  Canada,  India,  Australia,  and  parts 
of  Africa.  Except  tat  the  war  of  the  Revolution,  the 


WIALIB  AND  fOVHn 


469 


British  Empire  would  now  include  alio  the  territory  occu- 
pied by  the  United  Sutes. 
lyiming  from  the  quantity  oi  land  of  the  "natoral 

resources"  of  a  nation  to  the  number  of  inhabitants, 
we  note  that  this  itself  depends  m  turn  upon  tt?  extent 
of  the  territory  as  also  on  the  past  history  of  the  nation 
and  on  other  cooditioiis  which  will  be  coniidered  later 
in  this  chapter.  Many  nations  have  sought  to  increase 
their  wealth  and  power  by  increasing  their  population. 
In  fact,  a  chief  reason  for  extending  a  nation's  ter- 
ritory has  been  to  fill  it  with  cokmists.  A  country  is 
usually  alarmed  at  the  prospect  of  a  stationary  or  decreas- 
ing population.  France  is  now  trying  to  conserve  its 
populatiOT,  recognizing  that  national  strength  for  future 
war  or  for  future  political  position  among  the  nations  of 
the  earth  depends  largely  on  the  number  of  fighters  and 
of  worliers.  The  productiveness  of  these  people,  as  well  as 
the  productiveneaa  oi  the  lands  they  keep,  will  depend 
Urgely  upon  their  amdition  aa  to  vitality  and  accumulated 
knowledge. 

We  come  last  to  the  amount  of  accumulated  products. 
This  depends  on  two  diief  qualities :  first,  thrift,  which,  as 
we  have  seen,  leads  to  savings ;  and,  secondly,  in^wtive- 
ness,  which  has  led  to  the  cmtion  of  inomne-jprodudng 
instruments. 

f  3.  Per  Ciyila  Wealth  or  Pomtj 

We  have  considered  the  conditions  determining  the  ag- 
gregate wealth  of  naticMu.  We  may  pass  now  to  the  more 
important  subject  of  the  wealth  or  poverty  id  indivkluab. 
This  subject  may  be  divided  into  two  parts :  the  study 
of  average  or  per  capita  wealth,  and  the  study  of  its  dis- 
tribution  or  the  relative  wealth  and  poverty  among  differ- 
ent individuals.  By  the  per  capita  wealth  of  any  nation 
is  meant  the  quotioit  found  by  dividing  the  taul  n**Vy"flt 


470    ELEMENTAKY  niNCIPLBS  OF  EOmOiaCS  (QUP.X3CV 


wealth  by  the  number  of  inhabitants.  It  is  evident  that 
two  nations  may  compare  very  differently  as  to  aggregate 

and  as  to  per  capita  wealth.  The  small  countries,  Holland 
and  Switzerland,  when  compared  with  the  large  countries, 
India  and  China,  are  far  poorer  in  aggregate  wealth,  but 
far  richer  in  per  capita  wealth.  The  per  capita  wealth 
in  any  nation  will  thus  increase  with  an  increase  in  the 
total  wealth  (the  population  remaining  the  same)  and  de- 
crease with  an  mcrease  m  population  (the  total  wealth 
remaining  the  same). 

With  the  advent  of  democracy  in  politics  has  come  a 
greater  emphasis  on  per  capita  as  compared  with  aggregate 
wealth.  Under  autocracies  the  aim  was  to  increase  the 
wealth  of  the  nation  as  a  whole,  partly  for  the  mere 
aggrandizement  of  the  autocrat  or  potentate,  who  often  re- 
garded himself  as  a  sort  of  owner  of  the  nation  ("  I'itat, 
e*est  moi  and  partly  because  the  popular  sentiment  of 
national  greatness  was  satisfied  in  this  way.  Under  these 
conditions  an  increase  in  population  was  almost  invariably 
welcomed  and  encouraged.  But  since  the  individuals  of  the 
nation  have  become  its  rulers  and,  so  to  speak,  shareholders, 
they  have  regarded  increase  of  numbers  with  mixed  feelings ; 
for  while  on  the  one  hand  they  welcome  an  increase  in 
the  total  wealth  which  a  greater  population  brings,  on  the 
other  hand  they  do  not  relish  a  decrease  in  the  per  capita 
wealth  which  may  ensue.  In  the  democratic  ideal,  there- 
fore, an  increase  of  population  is  usually  welcomed  only  in  a 
new  coimtry  where  there  is  plenty  of  land,  or  in  a  country 
acquirmg  colonies  to  provide  room  for  a  surplus  population. 

The  effect  of  an  increase  of  national  wealth  on  per  capita 
wealth  will  evidently  depend  upon  the  ratio  between  land 
and  population.  In  a  sparsely  settled  country  an  increase 
of  p(^nilation  will  not  only  increase  the  aggregate,  but  also 
the  per  capita  wealth ;  for  each  new  worker  adds,  by  his 
coQperation,  to  the  eflSdency  of  workers  already  on  the 
grotmd.   A  very  few  men  cannot  work  together  to  as  great 


Sk.1) 


WEALTH  AMD  POVIXTY 


47^ 


advantt^e  as  a  moderate  number.  The  codperadon  and 
divisbn  of  labor  incident  to  a  moderate  increase  in  popu- 
lation inore  than  outweigh  tlie  fact  that  the  greater  popu- 
lation wiil  require  more  nourishment,  clothing,  and  other 
items  of  irxome.  Tn  short,  though  there  be  more  mouths 
ftrd,  jach  additional  mouth  metms  an  additional  pair 
of  hands ;  and  the  added  capacity  of  the  new  hands  to 
produce  exceeds  the  added  capacity  of  the  new  mouths  to 
constuie.  The  history  of  new  coimtries  shows  that  an  in- 
crease in  populatbn  is  a  blessing  individually  and  osA- 
lectively. 

When,  however,  the  country  is  settled  and  tilled  up  with 
population  to  a  certain  point,  the  opposite  becomes  true, 
and  a  ftesh.  increase  of  population,  while  continuing  to  in- 
crease aggregate  wealth,  will  decrease  per  capita  wealth. 
It  then  happens  that  each  new  pair  of  hands  adds  less  to 
production  than  each  new  mouth  subtracts  in  consump- 
tion. This  fact  sets  a  sort  of  elastic  limit  to  an  increase  ol 
population.  That  there  must  be  such  a  limit  is  evident, 
wnce  an  indefinite  number  of  people  cannot  be  supported 
on  one  acre  of  land.  We  know  as  a  generalization  from 
ordinary  observation  that  the  billion  and  a  half  peo|^ 
now  living  on  this  planet  could  not  be  supported  if  all  were 
packed  into  the  state  of  Rhode  Island  and  dependent  on 
Rhode  Island  for  sustenance.  Per  capita  poverty  would 
then  be  so  intense  that  peop%  would  die  of  actual  fftarva- 
tion.  Famine,  with  the  plagues  which  usually  follow  it, 
would  decimate  the  population.  Overpopulation  in  India 
and  China  often  results  in  famine  and  plague.  But  in 
western  civilization  much  milder  instances  of  msuffidency 
of  food  are  found.  Long  before  such  a  starvation  point  is 
reached,  every  increase  of  population  beyond  a  certain  point 
results  in  an  increased  death  rate.  In  fact,  statistics  show 
that  the  death  rate  increases  as  per  cafitu  wealth  decreuet. 
This  fact  is  due  to  the  unsanitary  conditions  which  poverty 
nec  jssarily  brings  —  conditions  which  pertain  not  so  much 


472    iXEMENi'ARY  PMNOPLES  OP  ECONOUICS  (Cbat.XXV 


to  the  quantity  of  food  as  to  its  quality  and  to  the  quantity 

and  quality  of  housing  and  other  comforts  and  conveniences 
of  life,  and  perhaps  above  all  to  conditions  of  employ- 
ment, espedaUy  hours  of  labor.  These  unsanitary  condi- 
tions incident  to  poverty  result  in  fatigue,  mahiutrition,  in- 
fection, diseases  such  as  tuberculosis,  and  deaths.  We  have, 
then,  ample  evidence  that  when  the  ratio  of  population  to 
land  becomes  excessive,  the  death  rate  is  mcreased,  and 
consequently  the  further  increase  of  p<^ulation  is  checked. 

This  law  of  per  capita  wealth  is  chiefly  based  on  the 
antenor  fact  that  land  is  an  essential  agent  in  production, 
and  that  each  successive  increase  in  the  productivity  of 
land  is  acquired  at  increasingly  great  cost  — or,  expressed 
otherwise,  that,  with  each  successive  increase  in  cost  the 
return  diminishes.  This  is  the  familiar  law  of  diminishing 
returns  in  agriculture.  There  is,  then,  based  on  facts,  a 
general  law  of  per  capita  wealth  in  relation  to  population. 
It  may  be  stated  ac  follows :  Given  a  particular  stage  of 
knowledge  and  of  the  arts  and  of  other  conditions  that 
determine  productivity,  an  increase  of  population  up  to 
a  certain  point  increases  tiie  per  capita  wealUi,  after  which 
a  further  increase  of  population  decreases  tiie  per  Gaoita 
wealth. 


S  4-  Population  in  Rektion  to  Wealth 

The  population  of  any  country  may  be  increased  eitiier 
by  births  or  immigration  and  decreased  either  by  deatiis  or 
emigration.  The  population  of  the  world,  as  a  whole,  can  be 
increased  only  by  births  and  decreased  by  deaths.  As  we 
are  more  interested  in  general  tiian  in  local  mcreases  or 
deoeases  in  popiUation,  we  may  overlook  the  questions  of 
emigration  and  immigration,  assuming  for  the  area  iMfr 
consideration  tiiat  tiiey  are  either  absent  or  balance  etth 
other. 

With  this  proviso,  we  may  say  tiiat  population  will 


SK.41 


WEALTH  AND  POVKSTY 


473 


decrease  if  the  death  rate  exceeds  the  birth  rate,  and 
win  increase  if  the  birth  rate  exceeds  the  death  rate.  As 
we  have  already  stated,  the  facts  show  that  the  death 
rate  increases  with  a  decrease  in  per  capita  wealth.  The 
birth  rate,  on  the  other  hand,  tends  to  decrease  with  a 
decrease  in  per  capita  wealth.  There  axe  ezcepti<m8  to 
this  last  statement,  but  these  ezcq>tion8  will  be  igncned 
for  the  present. 

If  we  assume  what  history  has  aUnost  invariably  shown 
to  be  the  fact,  that  in  a  sparsely  settled  country  the  Irirth 
rate  exceeds  the  death  rate,  so  that  the  population  tends  at 
first  to  increase,  we  are  now  in  a  position  to  state  what  will 
happen  to  the  popxilation  of  that  coimtry  in  future  genera- 
tions, quite  apart  from  any  incr«use  in  immigration.  By 
hypothesis  the  population  will  increase  at  first  and,  as  at 
first  each  increase  in  population  brings  an  increase  in  per 
capita  wealth,  it  will  continue  to  increase  as  long  as  this 
condition  continues.  But,  as  we  have  seen,  it  will  ultimatdy 
happen  that  per  capita  wealth  will  cease  to  increase  and  will 
begin  to  diiiunish.  It  will  then  happen  that  the  death 
rate  will  increase  and  the  birth  rate  decrease,  so  that  tb» 
increase  of  population  will  be  slackoied  and  ultimate 
cease  altogether.  Under  these  conditions,  then,  population 
in  a  new  coimtry  will  increase  up  to  a  certain  point  at  which 
it  will  cease  to  increase.  The  population  is  then  in  a  sort  of 
equlEbrium,  the  birth  rate  equi^aig  the  death  rate  becftwe 
the  per  capita  wealth  has  been  reduced  to  sudi  a  pqfat  aa 
to  bring  this  equilibrium  about. 

The  laws  of  population,  therefore,  may  be  stated  as  fol- 
lows: 

1.  An  increase  in  population  will  tend  to  increase  ag- 
gregate wealth  but  less  rapidly  than  population.  That  is, 
the  increase  in  population  tends  to  decrease  per  capita 
wealth. 

2.  A  decrease  in  per  capita  wealth  will  tend  to  increase 
the  death  rate  and  decrease  the  birth  rate.  That  is,  the 


474  EUMENTAKY  ntnicmn  or  tcosKmcs  iccat.  xxv 


decrease  in  per  capita  wealth  checks  the  increase  of  popu- 
lation. *^ 

In  accordance  with  these  laws  the  sequence  of  events 
is  usually  as  follows;  In  a  new  and  sparsely  settled  coun- 
try, peculation  at  first  increases.    As  the  country  fills  up 
this  increase  is  shickened  and  finally  comes  to  a  standstill 
when  the  death  rate  equals  the  birth  rate.    This  station- 
ary state  is  reached  when  the  people  are  either  unable  or 
unwilling  to  lower  the  standard  of  subsistence.   Such  a 
stationary  state  has  been  nearly  reached  in  India,  where 
people  are  unable  to  lower  the  standard  of  subsistence,  and 
m  France,  where  they  are  unwilling.    In  most  countries, 
population  is  stffl  increasing  and  will  probably  continue  to 
do  so  until  the  vast  areas  opened  up  by  exploration  and 
colonization  in  the  last  four  centuries  shall  have  been  filled 
up.     These  areas  include  North  and  South  America 
Australia,  and  parts  of  Africa.    The  rendering  available 
of  these  continents  to  occupation  by  Europeans  constitutes 
the  greatest  economic  event  of  modem  times  and  has 
relieved  for  a  season  the  pressure  of  population  on  sub- 
sistence.   Similar  relief  has  been  afforded  by  great  labor- 
saving  mventions  which  enable  a  given  population  to 
secure  increased  subsistence.    Future  inventions  may  be 
expected  to  increase  this  process.    But  ultimately  there 
must  be  a  limit  to  the  capacity  of  the  worid  to  support 
population. 

This  limit  on  human  population  is  the  same  sort  of  limit 
which  nature  sets  on  animal  and  plant  population.  Blades 
of  grass  multiply  until  they  cov«f  the  ground  on  which  they 
grow.  When  grass  is  sown  on  a  grass  plot,  it  multiplies 
with  great  rapidity,  but  after  the  whole  plot  is  covered  and 
there  is  no  room  for  more,  the  number  of  blades  remains 
nearly  stationary.  There  is  a  struggle  for  Kfe  constantly 
gomg  on,  and  the  death  rate  thus  produced  is  great  enough 
to  bahmce  the  birth  rate  which  the  capacity  of  the  soil 
alkmt.  Out  (rf  this  struggle  for  existence  among  animals 


Sk.4] 


WEALTH  AMD  POVERTY 


475 


and  plants  comes  what  Darwin  called  natural  "selection," 
and  it  is  interesting  to  know  that  Darwin's  first  idea  of  such 
a  struggle  came  from  reading  the  economist  Malthus,  who 
first  wrote  an  important  treatise  on  Population.  Popula- 
tion may  then  be  said  to  be  limited  by  the  means  of  sub- 
sistoice. 

Since  Malthus's  day  there  has  come  into  more  definite 
operation  what  he  called  the  "  preventive  check  "  on  popu- 
lation. While  it  is  still  true  that  among  the  poor  it  usually 
happens  that  an  increase  in  per  capita  wealth  tends  to 
increase  the  birth  rate  by  encouraging  marriages  or  mulrfag 
them  earlier  or  increasing  the  number  of  children  per  mar- 
riage, it  has  become  unfortunately  true  that  amon^  tiie 
weaUkiet'  classes  an  tncr«use  in  wealth  tends  sometiows  in 
the  opposite  direction.  Instead  of  wealth  being  then 
thought  of  as  a  means  of  supporting  children,  it  comes 
to  be  thought  of  as  a  means  for  gaining  or  maintaining 
**  social  position,"  and  the  more  wealth  gained,  the  more 
ambitious  are  its  possessors  that  its  enjoyment  may  not  be 
interfered  with  by  childbearing,  or  that  it  shall  not  be  de- 
creased by  subdivision  in  the  next  generation.  The  result 
is  that  the  wealthio'  classes  often  have,  on  the  average, 
smaller  families  than  the  poorer  classes.  We  must,  there- 
fore, modify  the  law  of  popxUation  so  as  to  read  that  an 
increase  in  per  capita  wealth,  instead  of  tending  always  to 
increase  the  l»rth  rate,  tends  first  to  increase  it  and  then, 
after  the  increase  of  wealth  passes  a  certain  point,  to 
decrease  it.  This  wealth  check  to  population  is  peculiar. 
It  is  quite  different  from  the  poverty  dieck.  The  poverty 
check  works  automatically  so  as  to  check  populaticai  when 
it  is  too  large  and  not  to  dieck  it  when  it  is  too  small.  But 
the  wealth  check  acts  in  the  opposite  way  —  or  rather  it 
would  do  so  if  it  were  sufficiently  strong  and  general,  which 
is  not  yet  tlM  case.  Then  it  wouki  come  about  that  the 
greater  the  per  capita  wealth,  the  more  would  population 
be  checked,  and  as  the  check  to  pqpulatimi  usually  tesdi 


476    ELEICENIARY  PUNCIFLES  OF  ECONOMICS  IClitf.XXV 


to  increase  per  capita  wealth,  this  would  stiU  further  de- 
crease population.  The  logical  result  is  depopulation  or 

"  race  suj'dde." 

At  present,  however,  this  wealth  check  is  confined  to  cer- 
tain parts  of  the  population,  and  results,  for  those  parts 
only,  in  "  race  suicide."   These  parts  include  particularly 
the  so-called  "  better  classes  "  of  the  population.  Statis- 
tics show  that  the  children  of  college  graduates  are  less 
numerous  than  the  graduates  themselves.  Thus,  besides 
depopulation,  there  is  another  danger,  degeneration.  If 
the  vitaUty  or  vital  capital  is  impaired  by  a  breeding  of 
the  worst  and  a  cessation  of  the  breeding  of  the  best,  no 
greater  calamity  could  be  unagined.  But  while  the  risk  of 
such  a  result  undoubtedly  exists,  this  is  not  immediate,  and 
an  mcreasmg  realization  of  its  possibility,  we  may  hope, 
will  lead  to  some  way  of  counteracting  it.    A  method  of 
attammg  the  contrary  result -- namely,  reproducing  from 
the  best  and  suppressing  reproduction  from  the  worst  — 
has  been  suggested  by  the  late  Sir  Francis  Galton  of  Eng- 
land, under  the  name  of  "eugenics."  This  movement, 
which  promises  to  become  a  strong  one,  aims  to  prevent 
(by  isolation  in  public  institutions  and  in  some  cases  by 
surgical  operations)  the  possibility  of  the  propagation  of 
feeble-minded  and  certain  other  classes  of  defectives  and 
degenerates,  and  also  to  develop  a  public  senthnent  which 
shall  condenBi  marriages  in  which  either  husband  or  wife 
has  a  ti-ansmissible  disease,  or  any  inheritable  tamt  of 
q>ilq)sy,  insanity,  etc,  or  is  otherwise  unfit  to  become  a 
parent. 


§5-  Diitribtttioa  of  Wealtli 

Having  considered  aggregate  and  per  capita  wealth,  we 
come  finally  to  the  distribution  of  wealth  among  different 
mdmduals.  Altiiough  a  whole  nation  may  be  rich  or  poor 
rJativdy  to  another  nation,  the  widest  difterences  between 


SK.SI 


WSAL1H  MUD  VOVmY 


477 


nations  are  small  as  compared  with  the  differences  ivitkin 
way  one  nati<»i.  Every  nation  has  its  extremely  poor,  its 
extremely  rich,  and  its  danes  in  intermediate  conditions.  In 
the  United  States  there  are  many  wage  earners  who  can- 
not earn  $i  a  day,  and  who  have  no  mcome  except  what  they 
earn  by  labor,  while  at  the  opposite  extreme  are  the  multi- 
millionaires who  receive  incomes  of  over  $1,000,000  a  month. 

What  are  the  reasons  for  such  prodigious  inequalities  in 
the  personal  distribution  of  wealth?  Are  such  inequalities 
injurious?  If  so,  are  they  preventable?  If  so,  by  what 
means?  These  are  some  of  the  most  biurning  questions  <rf 
the  day.  Out  of  them  spring  many  reform  movements, 
and  especially  socialism.  But  these,  like  other  practical 
problems,  are  ai^lications  of  economic  principles,  and 
cannot  be  discussed  in  a  book  designed  to  treat  (nily  oi 
economic  principles  themselves.  Suffice  it  to  say  that  no 
proper  answer  can  be  made  to  the  last  question  —  how  to 
cure  the  unequal  distribution  of  wealth  — until  we  have 
answered  the  first  question  —  what  causes  this  unequal  dis- 
tribution. As  often  happens,  more  study  has  abeady 
been  devoted  to  cure  than  to  diagnosis,  and  with  the  usual 
ineffective  result  of  quack  remedies. 

Our  present  object  will  be  to  set  forth  the  causes  which 
affect  the  relative  personal  distribution  of  wealth.  What- 
ever these  causes  may  be,  they  are  evidently  fundamental 
and  universal;  for  we  find  that  extremes  of  poverty  and 
riches  have  existed  at  all  times  and  places.  Th^  are  men- 
tioned in  the  Bible  and  other  histories  of  peoples  in  all  ages 
and  stages  of  civilization.  It  is  probable  that  the  degree 
of  inequality  differs  as  between  the  Oriental  civilizations, 
like  China  and  India,  <m  the  one  hand,  and  the  Occidental, 
like  England  and  France,  on  the  other,  and  also  as  betvreen 
the  older  settlements  of  western  civilization,  like  Russia  and 
Italy,  and  the  newer  like  the  United  States  and  Canada. 
But  the  fact  of  inequality  and  also  its  causes  are  neariy  the 
same  everywhere.  Distribution  diffen  in  Mme  degree^  it  k 


478    SUaONTA&Y  VUNCIPUS  OV  lOOifOMICS    \pm»r.  XXV 

true,  according  to  political  institutions,  as,  for  instance, 
between  Germany  and  England.  There  is  a  <  ^mparative 
absence  of  extreme  poverty  in  Germany  as  conirasted  with 
England  and  the  United  States ;  a  comparative  prevalence  of 
poverty  in  Russia  and  Italy ;  and  a  comparative  frequency 
of  extreme  opulence  in  Holland.  Nevertheless,  Professor 
Pareto,  a  Swiss  ecoi'omist,  has  found  that,  as  between  dif- 
ferent countries  for  which  statistics  are  available,  and  as 
between  various  periods  of  time,  the  statistics  of  inequal- 
ity in  the  distribution  of  wealth  show  a  remarkable  cor- 
respondence, more  close,  in  fact,  than  that  shown  by  the 
statistics  of  mortality. 

The  causes  which  have  produced  the  presmt  inequalities 
of  wealth  are  largely  historical;  that  is,  they  lie  in  the 
past.  It  usually  takes  more  than  one  generation  to  affect 
greatly  the  economic  standing  of  a  family.  For  this  reason 
some  people  have  foolishly  imagined  that  if  to-day  we  could 
once  correct  the  inequalities  in  wealth  handed  down  to  us 
from  the  past,  the  problem  would  be  solved,  and  with  a 
new  and  even  start  we  would  be  forever  rid  of  great  poverty 
by  the  side  of  great  wealth.  We  shall  soon  see,  however, 
that  if  wealth  were  once  equally  divided,  it  would  not  re- 
main so.  The  analysis  of  what  would  happ>en  will  serve 
as  the  best  introduction  to  our  study  of  distribution. 

§  6.  Equality  of  Distrflratica  an  Unstable  Condition 

Let  us  suppose  that,  through  some  commimistic  or  social- 
istic law,  the  wealth  in  the  United  States  were  divided  with 
substantial  equality.  It  is  proposed  to  show  that  this 
equality  could  not  long  enr'are.  Differences  in  thrift  alone 
would  reestablish  inequr  Aty.  We  cannot  suppose  that 
human  nature  could  be  so  changed  and  beonne  so  uidform 
that  society  would  not  still  be  divided  into  "  spenders  "  and 
"  savers" ;  much  less  can  we  suppose  that  different  p)eopIe 
would  all  spend  or  all  save  in  exactly  the  same  degree.  So 


wxALTH  Ain>  rovniY 


479 


long  as  there  are  any  differences  whatever  between  people 
in  regard  to  their  degttu  of  impatience  under  like  condi- 
tions, they  will  be  led  by  these  differing  degrees  of  im- 
patience to  exchange  present  and  future  incomes  among 
themselves.  As  a  consequence  there  will  ensue  differences 
in  spending  and  saving,  and  therefore  differences  in  capital. 

The  larger  the  amounts  saved  or  spent,  the  more  rapidly 
is  capital  gained  or  lost.  As  we  have  seen,  the  process 
by  which  individuals  thus  gain  or  lose  fortunes  by  saving 
or  spoiding  consists,  in  the  last  anal}rsis,  of  an  exchange 
of  present  and  future  income.  If  two  men  have  to  start 
with  the  same  income  of  $1000  a  year,  but  one  has  a  rate 
of  impatience  above  the  market  rate  of  interest  aiid  the 
other  has  a  rate  below,  the  first  will  continue  to  get  rid  of 
future  income  for  the  sake  of  its  equivalent  in  immediate 
income,  and  the  other  to  do  exactly  the  opposite.  Such 
substitutions  of  immediate  for  remote,  and  of  remote  for 
immediate  income  may  take  place  by  means  of  loans,  sales, 
or  changed  uses  of  capital.  The  man  with  spendthrift  tend- 
encies will  borrow,  i.e.,  pledge  future  income  for  the  sake  of 
present  income ;  or  he  will  sell  any  durable  goods  iHiich 
offer  ranote  income,  such  as  farms  or  forests,  and  buy 
perishable  goods  which  offer  immediate  income,  such  as 
champagne,  clothing,  horses,  and  carriages ;  or  he  will  change 
the  uses  to  which  he  puts  his  capital,  avoiding  those  whidi 
require  improvements,  and  choosing  instead  those  ou  iidudi 
he  can  realize  quickly,  thus  letting  his  property  run  down. 

The  man  with  saving  tendencies,  on  the  other  hand,  will 
lend  or  invest  present  inomie  for  the  sake  of  future,  will 
sell  perishable  and  buy  durable  goods,  and  will  make  far- 
sighted  uses  of  his  capital.  He  will  invest  in  stocks  and 
bonds  and  in  real  estate  capable  of  large  futiure  income. 
Both  men  will  pursue  their  re^)ective  policies  up  to  tiie 
point  where  their  marginal  rates  of  impatience  haniMHiixe 
with  the  rate  of  interest. 

These  effects  on  o^tal  are  worked  out  by  the  prin- 


48o    XLKMENTAKY  FRINCIPUS8  Of  BOONCailCS  [C»tf .  XXV 

dfdes  of  Chapter  Vn.  If  a  modificadon  of  the  inonne- 

stream  is  such  as  to  make  the  present  rate  of  realized  income 
exceed  the  "standard"  rate,  capital  is  being  depleted  to 
the  extent  of  the  excess,  and  the  person  will  grow  poorer. 
Individuals  of  the  type  of  Rip  Van  \y^nkle,  if  in  possesnm 
of  land  and  other  durable  instruments,  will  sell  or  mortgage 
them  m  order  to  secure  the  means  for  obtaining  enjoyable 
services  more  rapidly.  The  effect  will  be,  for  society  as  a 
whole,  that  these  individuals  who  have  an  abnormally  low 
appreciation  of  the  future  and  its  needs  will  gradually  part 
with  the  more  durable  instruments,  and  that  these  will 
tend  to  gravitate  into  the  hands  of  those  who  have  the 
q>posite  trait. 

It  requires  only  a  very  small  degree  of  saving  or  spend- 
ing to  lead  to  comparative  wealth  or  poverty,  even  in  one 
generation.  It  is  remarkable  how  much  may  be  saved  in 
a  lifetime  by  thrift.  Cases  are  sometimes  found  of  day 
laborers  who,  by  saving  and  putting  at  interest,  accumu- 
late within  a  lifetime  a  small  fortune,  and  in  the  mean- 
time rear  a  family.  As  Micawber  said,  a  man  with  an 
income  of  one  pound  a  week  will  reach  ultimately  poverty 
if  he  spends  just  one  penny  more,  and  reach  oputence  if  he 
spends  just  one  penny  less. 

A  central  r6Ie  in  the  distribution  of  wealth  is  thus  played 
by  the  degrees  of  preference  for  present  over  future  inccme 
and  the  rate  of  interest.  The  existence  of  a  general  market 
rate  of  interest  to  which  each  man  adjusts  his  rate  of  pref- 
erence supplies  an  easy  highway  for  the  change  in  his  cap- 
ital in  one  direction  or  the  other.  If  an  individual  has 
spendthrift  tendencies,  their  indulgence  is  facilitated  by 
access  to  a  loan  market;  and  reversely,  if  he  desires  to 
save,  he  may  do  so  the  more  easily  if  there  is  a  market 
for  savings.  ITie  irregularities  in  the  distribution  of  capi- 
tal are  thus  due  in  part  to  the  opportunity  to  effect  ex- 
changes in  the  present  and  future  parts  of  the  income- 
streams  of  diffoent  people.   The  rate  of  interest  b  dmjAy 


Sic.  6] 


WEALTH  AND  POVERTY 


48Z 


the  market  price  for  such  exchanges.  By  means  of  this 
market  price,  both  those  who  wish  to  barter  present  for 
futur-  income  and  those  vho  wish  to  do  the  reverse  may 
satisfy  their  desires.  The  former  will  gradually  increase, 
and  the  latter  gradually  diminish,  their  o^tal.  If  all  in- 
dividuals were  hermits,  it  would  be  much  more  difficult 
either  to  accumulate  or  to  dissipate  fortunes,  and  the  dis- 
tributimi  of  wealth  would  therefore  be  much  more  evm. 
Inequality  arises  largely  from  the  exchange  of  income,  car- 
rying some  individuals  toward  wealth  and  others  toward 
poverty.  In  short,  the  inequality  of  wealth  is  facilitated 
by  the  existoice  of  a  loan  market  In  a  soise,  then,  it  is 
true,  as  the  socialist  maintains,  that  inequality  is  due  to 
social  arrangements;  but  the  arrangements  to  which  it  is 
due  arc  not,  as  he  assumes,  primarily  such  as  take  away 
the  opportunity  to  rise  in  the  economic  scale.  On  the  con- 
trary, they  are  arrangements  which  facilitate  both  rising 
and  falling,  according  to  the  choice  of  the  individual.  The 
improvident  sink  like  lead  to  the  bottom,  while  the  provi- 
dent rise  to  the  t<^. 

But  thrift,  important  as  it  is,  is  not  the  only  road  to 
wealth,  nor  Uiriftlessness  the  only  road  to  poverty.  Besides 
differences  i'  the  rates  of  impatience,  there  are  equally 
potent  differences  in  ability,  industry,  luck,  and  fraud,  tiy 
ability  is  meant  one's  capacity  to  earn ;  by  industry,  the 
use  of  this  capacity.  Examples  of  getting  rich  from  ability 
and  industry  are  very  conunon.  Almost  all  the  rich  men 
in  this  country  who  have  made  thdr  fortunes  have  done  so, 
in  part  at  least,  through  ability  and  industry.  Often  luck 
has  aided  greatly.  There  are  many  examples  of  miners 
who  got  rich  in  Colorado  by  simply  stumbling  on  a 
gold  mine.  Ludi  plays  a  larger  rtAe  in  the  accumulation 
of  fortimes  than  many  are  inclined  to  beUeve.  The  "  un- 
earned increment "  is  usually  a  case  of  luck.  Unforeseen 
increase  in  grounil  rents  has  given  rise  to  large  fortunes 
from  time  immemorial.  It  u  abo  unfortunatdy  true  that 


483      ELEMENTARY  PRINCIPLES  OF  ECONOMICS  (Cbat.  XXV 

MOW  men  have  really  got  their  start,  if  not  their  kuger 
accumulations,  through  fraud.  This  has  sometimes  oc- 
curred through  "  high  finance,"  which  consists  very  largely 
in  making  contracts  with  one's  sdf  at  tlie  expense  of  others 
whose  interests  the  double  dealer,  as  director,  trustee,  etc., 
liappens  to  control.  If  a  man  is  a  director  in  a  corporation, 
and  votes  to  have  it  buy  materials  of  himself  at  any  price 
he  sets,  he  naturaUy  can  become  rapidly  wealthy  at  the  ex- 
pense of  the  stockholders.  Also  through  political  "  graft," 
and  especially  through  getting  city  franchises  for  gas  and 
waterworks  and  street  car  companies,  and  through  special 
tariff  le^slation,  many  men  have  beonne  wealthy.  Pov- 
er^,  on  the  o'her  hand,  has  often  resulted  not  only  from 
thriftlessness,  but  from  incompetence,  i.e.,  lack  of  ability, 
sbthfulness  (lack  of  industry),  and  misfortune  or  bad  luck, 
and  from  having  been  ddrauded  by  others. 

We  conclude,  therefore,  that  equality  of  wealth  is  an 
unstable  condition  and,  even  if  once  established,  would  not 
endure,  because  of  imequal  forces  of  thrift,  ability,  industry, 
Iwk,  and  fraud. 

But  inequality  once  established  tends,  by  inheritance,  to 
perpetuate  itself  in  future  generations.  The  workman  who 
accumulates  a  few  thousand  dollars  from  nothing  makes  it 
easier  for  his  children  to  accumulate  more.  He  f^ves  them 
a  start  or  a  "  nest  egg."  Recently  four  sons  of  a  Qm- 
necticut  farmer  met  in  a  famjly  reunion.  Many  years  pre- 
viously the  father  had  sent  them  into  the  work!  to  make 
theur  fortune,  giving  each  $700  to  start  with.  When  they 
met  at  the  recent  family  reunion,  all  were  worth  thousands. 
The  well-known  woman  millionaire,  Mrs.  Hetty  Green, 
is  an  example  of  a  person  who  inherited  a  large  fcv  ine 
and  then  accumulated  more,  by  virtue  of  her  km  "  degree 
V  impat'ence,"  i.e.,  her  preference  to  accumulate  for  the 
future  rather  than  to  spend  in  the  present.  A  fortune  of 
$6,000,000  was  bequeathed  her,  and  now  her  fortime  is 
xqmted  to  be  wwth  |xoo,ooo,ooo. 


WBALn  AND  POVUTY 


483 


Lflcewiae  poverty  may  be  pawed  down  from  genentkm  to 

generation.  A  special  cause  for  handing  down  inequality 
of  fortunes  lies  in  the  reduction  of  the  birth  rate  among 
the  rich.  As  we  have  e^qplained,  the  tendency  to-day  b 
for  the  poor  to  1m  •  Vk^  hirtk  nte,  sad  for  the  rich  to 
have  a  km  Mrth  rate.  There  results  a  tendency  toward  an 
increase  in  the  num^H;^s  of  the  poor  and  a  decrease  in  the 
numbers  of  the  rich.  This  result  tends  to  exaggerate  the 
differences  iate  per  espita  wealth  between  the  two  classes ; 
f(M:  m  tite  liper  classes  there  will  be  a  relatively  larger 
share  for  the  few  who  inherit  fortunes,  and  in  the  low« 
classes  there  will  be  an  increasingly  smaUer  share  for  the 
many. 

We  see,  then,  that  there  is  at  least  a  tendency  for  the 
rich  to  grow  richi  1  the  poor  to  grow  poorer.  We  may 
even  go  so  far  as  u>  y  that  the  ridier  a  man  or  ftunily 
becomes,  the  eaiicr  k  is  to  gpow  richer,  and  that  the  poorer 
a  family  becomes,  the  more  difl&cult  it  is  to  keep  from 
growing  poorer.  Large  fortunes  often  grow  without  effort. 
All  that  is  necessary  is  for  their  owners  to  refrain  from 
8C|Mmdering.  On  the  other  hand,  a  family  once  caught  in 
pov«ty  is  apt  to  be  drawn  deeper  into  the  mire.  Overwork, 
anxiety,  and  xmsanitary  svuroundings  bring  on  disease  or 
disability,  which  robs  the  family  <rf  what  little  it  once  had. 
Tk»  of^MMTtunity  of  the  weakhy  is  their  wealth,  and  the 
curse  of  the  poor  is  their  poverty.  "  To  him  that  hath 
shall  be  given,  and  from  him  that  hath  not  shall  be  taken 
away  even  that  whidi  he  hath." 

§7.  Tfca  Itoits  oi  Inrichnwiit  md  InpofitMBtat 

Yet  there  are  limits  to  enrirhwifnt  and  unpoveridmient. 

The  ordinary  downward  limit  is  readied  when  a  man  loses 
all  his  capital.  He  has  then  no  source  of  income  left  except 
his  own  labor.  When  a  man  has  succeeded  in  losing  all 
his  d^tal,  the  process  uMally  omies  to  an  aid,  beonise 


484    ELEUESTASLM  PRINCIPLES  OF  ECONOMICS     [Chap.  XXV 

socfcty,  in  sdf-i»otection,  decrees  that  it  shall  go  no  farther. 
He  is  in  most  civilized  lands  not  allowed  to  sell  himself  or 
to  pledge  much  of  his  distant  future  services.  But  where 
there  is  no  such  safeguard,  the  unfortunate  victims  may 
sink  into  even  lower  stages,  such  as  the  debt  servitude  in 
the  Malay  Archipelago  or  Russia,  and  to  some  extent  in 
Ireland ;  or  they  may  even  sell  themselves  or  their  families 
into  slavery.  In  most  countries  the  poor  come  to  be  a 
large  and  permanent  as  well  as  a  helpless  class. 

Next,  as  to  the  upper  limit.  We  have  seen  that  the  op- 
portunity to  increase  one's  wealth  depends  upon  the  market 
for  present  and  future  goods,  le.,  the  loan  and  investment 
market.  A  hermit  cannot  become  inmiensely  wealthy ;  nor 
can  any  of  the  inhabitants  of  a  small  island,  if  cut  of!  Irom 
the  rest  of  the  world.  The  utmost  that  a  man  ui  an  isolated 
community  can  own  is  the  capital  which  that  community  has 
or  can  get  —  its  land,  dwellings,  means  of  locomotion  and  of 
manufacture,  etc.  These  are  necessarily  limited  by  the  size 
of  the  community.  As  the  market  widens,  the  limits  to 
the  growth  of  large  fortunes  widen  also.  To-day  there  is 
no  limit  to  what  one  man  may  accumulate  except  that  he 
cannot  more  than  "  own  the  earth." 

This  relationship  between  the  possible  size  of  individual 
fortunes  and  the  size  of  the  market  to  whidi  the  owner  of 
the  fortunes  has  access  is  important.  Practically  it  means 
that  in  these  modem  times,  when  ahnost  the  whole  world  is 
one  great  market,  the  possibilities  of  individual  fortunes  are 
greater  than  ever  before.  Few  people  realize  this  fact;  for 
most  people  imagine  that  at  any  time  in  the  world's  history 
any  fortune  could  have  increased  at  compound  interest. 
But  a  fortune  is  capital-value,  and,  as  we  have  seen,  capital- 
value  has  no  power  to  produce  income,  but,  on  the  contrary, 
is  merely  the  discounted  value  of  anticipated  income.  The 
only  way  a  man's  fortune  can  increase  at  compound  mterest 
b  by  his  (xmstantly  remvesting  income  as  it  comes  in ;  that 
^  exduaging  it  fw  other  aad  kter  income  at  the  discoun 


WtAUm  AMD  POVSKR 


485 


values  <d  the  lattor.  But  evMentty  he  must  find  lellen  ci 
some  such  other  and  hiter  income  before  he  can  buy  it. 
His  income  has  no  power  whatever  of  itself  to  create  other 
income.  In  short,  an  extreme  upper  limit  to  the  growth 
of  any  individual  fortune  is  set  the  scarcity  d  faicome- 
producing  instruments  available. 

The  common  idea  that  "money  has  power  to  breed 
money"  leads  to  absurdity  when  applied  to  compound 
interest  Wore  it  true,  any  person  m^t  leave  fortunes  to 
posterity  far  exceeding  the  possible  wealth  which  this 
earth  can  hold.  The  prodigious  figxires  which  result  from 
reckoning  compovmd  interest  always  surprise  those  who 
make  the  cmnputaticm  for  the  first  time,  (tee  dollar  put  at 
compound  interest  at  four  per  cent  would  amount  in  one 
century  to  $50,  in  a  second  centiuy  to  $2500,  in  a  third 
century  to  $125,000,  in  a  fourth  century  to  $6,000,000,  in 
a  fifth  century  to  $300,000,000,  in  a  azth  century  to  15 
unions,  in  a  seventh  century  to  750  billions,  in  an  eighth 
century  to  40  trillions,  in  a  ninth  to  2  quadrillions,  and  in  a 
thousajid  years  to  100  quadrillion  dollars.  Now  the  total 
capitel  in  tlw  United  States  aeiy  about  100  Inlfions,  and 
that  in  the  world  at  large  —  even  assuming  that  the  per 
capita  wealth  elsewhere  is  as  large  as  the  United  States, 
which  is  an  absurdly  large  allowance  —  must  be  less  than 
»  txiffioos,  wUdi  is  <»ly  mw  fifty-thoosandth  part  <d  what 
we  have  just  calculated  as  the  amoimt  at  ooo^imd  interest 
of  $1  in  1000  years.  Yet  1000  years  is  only  half  the  time 
since  the  Christian  era  began.  In  2000  years  the  $1  would 
amount  to  100  quadrillkm  times  100  qmdrilHons,  which  is 
many,  many  times  as  much  as  a  worU  composed  of  solid 
gold.  Needless  to  say,  such  a  prodigious  increase  of  wealth 
could  never  actually  take  place,  for  the  simple  reason  that 
this  b  a  fimte  worid.  The  difficulty  Bes,  not  singly  in  the 
reluctance  of  people  to  provide  for  acaraitthtton  several 
centuries  after  their  death,  but  also  to  the  fact  above 
mentioned,  that  large  accumulations  would  reduce  ofqjKV- 


486    SLEKENXAXY  FIXHCmiS  OT  SOONOMKB  ICur.ZZV 

timities  ioc  ranvestmoit  and  therefore  reduce  the  rate  of 
interest.  The  attempt,  for  instance,  to  invest  triUimis 
every  year  would  drive  up  the  prices  of  all  investable  prop- 
erty, ».«.,  all  capital.  To  invest  such  sums  would  practically 
require  the  purchase  by  the  rich  man  of  all  existing  railways, 
steamships,  factories,  lands,  dwellings,  etc.  But  many  of 
the  present  Owners  of  these,  having  already  sold  a  large 
portion  of  their  property  and  thus  reduced  their  d^ees  of 
impatience  to  equality  with  che  inevailing  rate  of  interest, 
would  not  part  with  more  except  at  prices  so  high  that 
the  purchaser  would  make  little  or  no  profit  or  interest  on 
his  investment.  Thus,  the  approach  toward  the  limit  of 
investment  wouM  reduce  the  rate  of  interest  and  retard,  and 
finally  altogether  prevent,  further  accumulation. 

There  are  some  interesting  examples  of  long-continued 
remvestments.  Benjamin  Franklin  at  his  death,  in  1790, 
left  £1000  to  the  town  of  Bostm  aiMi  the  same  sum  to 
Philadelphia,  with  the  provisos  that  they  should  accumu- 
late for  a  hundred  years,  at  the  end  of  which  time  he  calcu- 
lated that  at  five  per  cent  each  legacy  would  amount  to 
£131,000.  In  the  case  oi  tlw  Boston  gift,  it  actua% 
amounted,  at  the  end  of  the  century,  to  $400,000,  and  has 
since  accumulated  to  about  $600,000.  The  stun  received  by 
the  dty  of  Philadelphia  has  not  increased  so  fast 

Another  interesting  case  oS  accumulation  is  that  of  tlw 
Lowell  Institute  in  Boston,  which  was  founded  in  1838  by 
a  bequest  of  $200,000,  with  the  condition  that  ten  per  cent 
of  the  mcome  from  it  should  be  reinvested  and  added  to  the 
prmdpal  every  year.  A  peculiarity  ct  this  pccfvbha  it  that 
it  applies  in  perpetuity.  There  is,  therefore,  theweticany, 
no  limit  to  the  future  acciunulation  thus  made  possible, 
and  it  would  be  interesting  to  know  what  will  be  its 
hkUxy  in  future  onturtes.  The  fond,  after  otiy  67  yean, 
amounted  to  $1,100,000.  Another  example  is  the  "  Sailors' 
Snug  Harbor"  of  New  York,  which  has  outgrown  the  work 
oiginally  intended  and  is  now  applying  to  the  courts  for  relief. 


WBALIH  AMD  VCmOOt 


4«7 


§  8.  The  Cycle  of  Wealth 

Vfiih  a  world  market  for  investment,  we  have  every  pros- 
pect of  a  great  increase  in  private  fortunes  in  the  next  few 
centuries.  But  practically  the  limit  reached  in  the  history 
Ol  most  large  fortunes  is  only  a  very  small  part  of  the  hi^ 
limit  we  have  set,  that  of  "  owning  the  earth."  There  Ls 
usually  a  reaction  against  the  desire  to  accumulate.  Each 
reduction  in  the  rate  of  interest  tends  to  chedc  the  desire 
to  accumulate.  Moreover,  this  desire  aooa  palls.  A 
multimillionaire  recently  left  his  fortune  to  accumvdate 
until  21  years  after  the  death  of  his  youngest  heir,  with  the 
intention  of  accumulating  by  that  time  the  Uu^^t  fortune 
on  record.  But  his  hr*'^  much  preferred  to  use  it  during 
thdr  own  lifetime,  and  succeeded  in  breaking  the  will. 
Even  had  they  not  succeeded,  those  who  finally  came  into 
the  fortune  would  probably  have  begun,  at  kast  i&  a  few 
generations,  to  dissipate  it ;  for  the  usual  dfect  of  great 
wealth  is  to  produce  habits  of  spending. 

It  has  already  been  noted  that  one's  rate  of  impatience 
for  futiu%  income,  given  a  curtain  prospective  inowne* 
stream,  will  be  hi|^  or  low  according  to  one's  past  habits.  H 
a  man  has  been  accustomed  to  simple  and  inexpensive  ways, 
he  finds  it  fairly  easy  to  save  and  ultimately  to  accumulate 
a  considerable  amount  of  property.  These  habits  of  tiirtft, 
being  traittmitted  to  the  next  genoatifm,  result  in  still 
further  accvunulation,  until,  in  the  case  of  some  of  the  de- 
scendants, affluence  or  great  wealth  may  result.  But  if  a 
man  has  been  brought  up  in  the  lap  of  luxury,  he  may  have  a 
heana  desire  for  present  enjoyment  than  if  he  had  been 
accustomed  to  the  simple  living  of  the  poor.  The  effect  of 
this  factor  is  that  the  children  of  the  rich,  who  have  bean 
accustomed  to  luxurious  living,  and  who  have  Inherited 
only  a  fraction  of  their  parents'  means,  and  often  lack  their 
ability  and  business  training,  will,  in  attempting  to  keq>  up 
the  former  pace,  be  compdled  to  check  the  amimulaticm 


488    ElEMENTARY  ntlNCIPLES  OP  ECQMQmcS    |Cka».  XXV 

and  even  to  start  the  opposite  process  of  the  dissipation  of 
their  family  fortune.  It  requires  a  certain  amount  of  abiKty 
merely  to  maintain  a  fortune.    Bad  investments  carelessly 
entered  into  are  often  the  means  of  impairing  or  even  anni- 
hilating a  fortune.   And  then  the  unfavorable  effects  of 
luxury  begin.   A  few  years  ago  there  came  to  this  coun- 
try an  Englishman  who  had  inherited  a  large  fortune,  but 
who  had  also  inherited  the  desire  to  indulge  himself  in  the 
present  to  the  fuU  extent  of  his  capacity.    To  defeat  the 
effects  of  this  desire,  his  parents  had  left  him  only  the  In^ 
come  of  their  wealth  "  in  trust  "  (and  it  is  not  an  unusual 
thmg  m  England,  where  there  are  spendthrift  sons,  to  leave 
property  so  that  they  may  use  only  the  income).  Never- 
theless, this  man  contrived,  by  chattel  mortgages  and  in 
other  ways,  to  spend  a  good  deal  more  than  the  interest 
annuaUy  accruing,  and  he  was  always  in  debt  and  in  trouble. 
The  product  of  sudi  a  course  is,  sooner  or  later,  what  is 
called  a  "  shabby  genteel "  dass.   EventuaBy  peofde  in 
this  class  will  have  to  overcome  theu-  pride,  go  to  work, 
and  become  laborers  —  and  often  common  laborers.  After 
a  few  generations  of  poverty  and  the  illiteracy  which  goes 
with  it,  the  wealth-holding  ancestry  is  lofgotten.  It  is  said 
that  examples  of  such  ancestry  are  common  among  laboring 
men,  and  would  be  more  generaUy  recognized  were  it  not 
for  the  loss  of  records  which  is  the  inevitable  accompani- 
m«it  of  illiterate  poverty. 

Thus  the  limits  set  by  scarcity  of  investments  (i.e., 
scarcity  of  purchasable  instruments  or  shares  in  them)  to 
the  possible  growth  of  huge  fortunes  are  always  far  higher 
than  the  vast  majority  of  fortunes  ever  approadi.  Most 
fortunes  rise  and  then  faU,  the  turning  point  being  due  to  the 
abandonment  of  thrift  and  the  substitution  of  thriftlessness 
irtiidi  the  fcwtune  itsdf  sooner  or  kte  engenders.  An  old 
adage  has  put  this  observation  %  the  form,  "  From  aUrt 
slwves  to  shirt  sleeves  in  four  generations."  We  have  no 
labeiitors  to-day  of  the  fortune  of  Troesus,  who,  in  his  day. 


WEALTH  AMD  POVOTY 


489 


was  supposed  to  be  a  wealthier  man  than  Rodcdefler,  not 
only  in  propcnrtion  to  the  wealth  of  his  time,  but  absolutely. 
A  man  with  a  start  of  that  kind  ought  to  have  been  able  to 
make  the  fortime  increase  rather  than  decrease  with  the 
future,  and  yet  we  know  of  no  heirs  to  that  fortune.  To-day 
we  have  a  large  number  of  w^tlthy  families  in  this  country, 
but  most  of  them  are  only  one  generation  old!  Thus  the 
very  rich  families,  so  far  from  growing  rich  indefinitely, 
usually  do  not  even  omtinue  rich  more  than  a  few  genertr 
tions,  but  grow  poor,  arriving,  too,  at  that  condition  without 
the  vitality  or  the  character  necessary  to  retrieve  themselves. 

Likewise,  at  the  opposite  extreme,  it  does  not  always  h^ 
pen  that  the  poor  grow  poorer  or  evm  remain  poor.  Jiut 
as  wealth  often  relaxes  thrift,  poverty  sometimes  stimu- 
lates thrift.  The  children  of  the  poor  then  become  fired 
with  ambition  to  get  on  in  the  world  simply  because  they 
are  pocnr.  These  people  rise  from  the  ranks,  and  rise 
idly.  It  should  be  noted,  however,  that  unlike  the  down- 
ward movement  of  large  fortunes,  this  upward  movement 
b  the  exception,  not  the  rule.  It  may  be  that  ninety  per 
cent  of  large  fortunes  readi  a  maximum  and  dec^ne,  bat 
it  is  doubtful  if  one  or  two  per  cent  of  the  poor  reach  a 
minimum  and  rise.  Many  fall  into  pauperLim  or  die.  The 
vast  majority  simply  remain  poor. 

We  see,  then,  that  while  it  Is  very  eaqr  ixx  those  who 
have  once  reached  the  top  of  the  economic  strata  to  stay 
at  the  top,  this  result  seldom  occurs,  chiefly  because  of 
their  conversion  from  savers  to  spenders;  and  while  re- 
versdy  it  is  very  easy  for  those  who  once  reach  the 
bottom  to  stay  at  the  bottom,  they  do  not  always  do  so, 
du^y  because  of  their  conversioa  from  tsgeo^xa  to  saven. 

§  9.  Th0  Adiud  Slsls  tiM  IMsMbvtfoo 

The  churning  up  of  society  residting  from  saving  and 
q)ending  and  the  other  causes  above  mentioned  neutralises 


490    KUMSNTAKY  PIXHaPLES  OF  XOOMOKICS  (Cbav.XZV 


the  toideiicy  we  have  mentkner!  for  ihe  ridi  to  grow  lidter 

and  the  poor  to  grow  poorer,  and,  what  is  more  important, 
it  prevents  —  to  some  extent  —  the  establishment  of  wealth- 
castes  by  continually  changing  the  personnel  of  wealth  and 
poverty.  The  individuals  of  society  are  like  goldfidi  ia  an 
aquarium.  Those  once  started  upward  continue  to  ascend 
for  a  time,  whereupon  they  start  down  again.  Those  once 
started  downward  continue  to  descend  until  perhaps  they 


o 

Fn.  4<- 


reach  the  bottom,  whereupon  they  (may)  start  up  again. 
To  o(»nplete  the  figure,  we  must  suiqxMe  the  shi^w  of  the 
aquarium  to  be  like  a  bell,  very  small  at  the  top  and  very 
large  at  the  bottom.  There  is  room  for  only  a  few  at  the 
top,  and  the  struggle  of  many  to  get  there  makes  it  difficult 
f<Hr  ai^,  idiile  it  makes  it  easy  for  all  to  descend.  There  is 
most  room  at  the  bottom,  and  consequently  there  is  less 
change  there  than  anywhere  else.  Reversely,  at  the  top 
there  is  most  diange.  The  constant  dianging  of  position  in 
this  bell  jar,  while  of  '^eat  moment  to  the  individual,  does 
not  greatly  affect  the  distribution  of  society  as  a  whole. 
There  will  always  be  about  the  s;ime  proportion  of  fish  at 
each  sucoenive  stratum.   Pn^esior  Paxeto  has,  in  fact, 


wEAum  AMD  vovxsn 


49X 


npcesented  tiw  distributkm  of  wealtb  by  a  bdUhaped 
figaie  which  he  calls  the  social  pyramid.  This  is  shown  in 
Figure  48.  The  mimber  of  people  having  an  income  be- 
tween Oa  and  Ob  is  represented  by  the  contents  of  the  bell- 
shaped  vessel  between  the  plane  of  aa"  and  the  plane  of 
b'b".  The  social  pyramid  represents  the  fact  that  the 
larger  the  size  of  a  fortune,  the  smaller  the  number  of  people 
who  have  it.  There  are  many  more  at  the  bottom  than  at 
the  top.  We  have  no  exact  ^tistics  fonr  tl^  oonntry, 
but  a  rough  popular  estimate  states  that  over  half  of  our 
population  have  incomes  of  less  than  $600  per  year,  and  of 
the  remaining  half  about  half  (t .e.,  one  fourth  of  the  whole 
popidaticm)  enjoy  incomes  htimtea  $600  and  $i3oo,  and 
the  other  half  (».«.,  the  remainmg  fourth  of  the  wbok  pofNH 
lation)  have  incomes  over  fxaoa 

§  10.  The  InheritaBce  ef  Ropeilj 

The  frequency  of  changes  in  fortunes,  whether  up  or  down, 
will  differ  greatly  in  different  coimtries  according  to  the 
ages  <rf  the  countries,  ami  their  kws  and  customs.  Among 
these  factors  the  laws  and  customs  as  to  the  inheritance  of 
property  are  of  great  importance.  If  there  is  an  equal  distri- 
bution among  the  children  of  the  rich,  the  fortune  b  pretty 
sure  to  run  itadf  oat  in  a  few  generations  or  centuries ;  but 
in  England  this  result  is  prevented  by  giving  to  the  oldest 
son  the  bulk  of  the  estate  and  cutting  everybody  else  off 
with  small  stipoids.  The  effect  of  thb  curtom  is  to  mdn^ 
tahi  the  faa^^^ty  and  the  integrity  of  the  large  estate. 
In  this  country  there  are  signs  that  we  are  gradually  chang- 
ing toward  this  English  custom  by  which  a  rich  man,  instead 
of  dividing  his  forttme  evenly,  leaves  the  bu&  of  it  to  ooe 
(rf  Us  hehs.  Sudi  a  change  in  testamentary  custom  wOl 
furnish  a  new  and  powerful  tendency  for  eiisting  inequal* 
ities  to  be  accentuated  and  perpetuated. 

One  of  the  special  problemi  cnmwctad  with  khiritaiinii 


49'    KUMXNXAfty  PUNCIPUS  OV  lOOIIQKICi  |Cfe«.SXf 

b  tlttt  (rf  the  costrd  over  wealth  a  man  should  be  allowed 

to  exercise  after  he  has  died.  This  problem  has  frequently 
been  under  discussion.  It  is  sometimes  called  the  problem 
of  "  the  dead  hand."  Out  of  this  problem  grew  the  "  statutes 
of  mortmain  " ;  and  abo  theommKm  law  rule  that  no  testa- 
tor can  "  tie  up  "  his  estate  beyond  "  lives  in  bemg  "  at  the 
time  of  his  death  plus  21  years.  This  common  law  rule  ap- 
plies, however,  only  to  so-called  "  private  "  bequests.  To 
escape  its  operation  a  rich  man  very  often  leaves  his  fortune 
to  some  "  charitable  "  foundation.  But  as  it  is  ill  advised  to 
leave  a  fortune  in  the  hands  of  private  persons  for  a  number 
of  generations,  so  it  has  been  found  ill  advised  to  leave  for- 
tunes in  perpetuity  in  any  shape  whatever;  for  the  result 
is  that  after  a  few  generations  it  is  impossible  to  carry  out 
the  instructions  of  the  donor  without  doing  harm  —  how- 
ever good  his  intentions.  Conditions  will  have  come  about 
which  the  donor  could  not  foresee  or  i»ovide  iot.  In  Nor- 
wich, England,  for  instance,  there  was  left  many  generations 
ago  a  small  sum  to  support  a  preacher  for  the  Walloons,  who 
should  utter  a  sermon  in  Low  Dutch  every  year  at  a  certain 
time.  That  provision  is  still  carried  out,  althou(^  thm  are 
no  longer  any  Low  Dutch  in  this  place.  There  is  no  one  to 
understand  the  sermon,  and  yet  it  is  preached  every  year. 
Recently  the  jnreadier  has  learned  one  sermon  by  heart  and 
repeats  it  every  year  in  order  to  receive  his  ranmmatkm. 

Li  1862  a  lady  died  in  England  and  left  a  fortune  to  be 
used  for  the  teaching  of  the  doctrines  of  Joanna  Southgate. 
The  lattw-  had  had  a  large  religious  following  in  England, 
but  at  this  time,  1862,  there  was  not  a  wof^  soul  in  Big- 
land  who  believed  in  her  doctrines.  Here  was  the  curious 
spectacle,  therefore,  of  a  fortune  being  left  in  the  hands  of 
trustees,  no  one  of  whom  could  be  found  who  believed  in 
these  doctrines.  In  1587  a  certain  man  died  leaving  to 
the  almshouse  of  Suffolk  certain  real  estate,  the  income 
of  which  was  then  £  113.  The  income  at  present  is  £3600, 
far  more  than  tiu  institution  can  use,  and  the  trustees  do 


8k.  tti 


WEALtB  AND  TCfVBITy 


493 


not  know  what  to  do  with  it.  The  result  has  been  to  make 
the  afanshouse  a  mecca  for  all  poor  pec^e  for  mQes  around 

and  to  pauperize  the  neighborhood. 

The  custom  of  making  wills  is  one  that  is  handed  down 
to  us  from  the  Roman  days.  Regarding  wills,  there  were 
no  laws  in  ancient  Germany,  no  provisions  in  the  Levitkal 
laws  of  the  Jews,  none  among  the  Hindus,  and  only  slight 
tratss  among  the  ancient  Greeks.  When  we  talk  of  the 
sacredness  of  private  property  and  the  right  to  dispose  of 
it  by  wOl,  we  are  merely  expressing  our  loyalty  to  the 
particular  custom  imder  which  we  now  happen  to  live. 

It  may  be  that  in  the  future  a  remedy  for  some  of  the 
present  evils  connected  with  the  ownership  of  wealth  may 
be  found  by  limiting  or  regulating  the  inheritance  of  wealth 
as  to  time  or  amount,  by  inheritance  taxes,  by  limiting 
private  ownership  in  certain  perpetuities,  by  substituting 
leaseholds  for  perpetual  franchises  or  for  unencumbered 
titles  in  mineral  lands,  or  even  in  all  lands.  There  is  mudi 
to  be  said  on  both  sides  of  these  proposals,  but  it  b  no  put 
of  our  present  task  to  enter  upon  their  discussion. 


CHAPTER  XXVI 


WEALTH  AND  WELFAKE 

§  I.  Trm  and  ICutet  Worth 

An  often-quoted  passage  from  the  Bflik  statea  that 
"  the  love  of  money  is  the  root  of  all  evil"  Another  statea 
that  "it  is  easier  for  a  camel  to  go  through  the  needle's  eye 
than  for  a  rich  man  to  enter  into  the  kingdom  of  heaven." 
Oa  the  other  hand,  poverty  has  always  been  regarded  as 
an  evil.  Agur  prayed  that  he  should  be  given  neither 
riches  nor  poverty.  This  is  the  theory  of  the  golden  mean. 
Still  another  view  is  that  while,  absolutely,  wcai.h  is  good 
and  the  more  of  it  per  capita  the  better,  yet  its  unequal 
distribution  is  an  evil.   This  is  the  view  of  the  socialists. 

In  all  these  views  there  is  some  truth.  Extreme  wealth 
and  extreme  poverty  are  alike  evils,  and  the  disparity  be- 
tween the  extremes  is  also  an  evil.  Moreover,  besides  these 
evils  dependent  on  the  quantities  of  wealth  are  other  evils 
dependent  on  the  qualities  of  wealth.  But  how  can  it  be 
that  wealth,  which  is  merely  the  physical  means  for  satis- 
fying human  wants,  can  ever  do  harm?  We  have  escaped 
this  question  hitherto  because  we  have  accepted  wealth, 
so  to  speak,  at  its  market  valuation.  As  was  explained  at 
the  outset,  prices  are  determined  by  the  actual  desires  of 
men,  and,  when  seeking  to  eiqdain  prices  as  they  we,  we 
were  not  obliged  to  inquire  as  to  whether  the  desires  iriiidi 
explain  them  are  foolish  or  wise,  good  or  bad.  There  was 
no  need  to  distinguish  between  the  desires  wbvJi  fix  the 


teal 


WBAL-m  AMD  WlttAlB 


pcket  of  Bflilct  and  thoie  idiidi  fix  the  prices  of  obcoeae 
Htenture.  Now,  however,  we  propose  to  go  a  little  deqw 
and  to  point  out  instances  in  which  "  desirability  "  is  short- 
sighted and  foolish,  and  in  general  to  point  out  the  variouft 
ways  inwhidi  maAet  valuations  fail  to  give  a  true  picture 
of  actual  wwth.  As  we  have  seen,  market  valuations  <rf 
fortimes  do  not  even  show  their  comparative  desirabilities, 
because  of  the  wide  differences  between  the  w^y^rginftl 
desirabilities  of  money  to  cKfferent  people.  The  mai^nal 
^sirability  of  money  decreases  rapidly  with  an  increase  of 
wealth,  so  that  —  beyond  a  comfortable  competence  —  the 
addition  of  millions  means  little  that  is  really  desirable. 
In  fact,  to  some  men  Iflce  Mr.  Carnegie,  swollen  foftnnes 
becrane  a  burden  and  rcqwnsiWHty  rather  than  an  addition 
to  pffffnuT  ipn^ification* 

S  2.  Evils  Connected  with  the  Quantity  of  Wealth 

That  extreme  poverty  is  an  evil  needs  no  proof.  We 
shall,  therefore,  not  discuss  the  problem  of  poverty.  The 
diief  causes  of  poverty  we  have  already  ^own,  and  its 
remedies  lie  beyond  the  scope  of  our  discussion.  Suffice  it 
to  say  that  the  problem  is  the  greatest  of  all  practical 
economic  problems  and  is  justly  claiming  a  large  share  of 
the  attention  of  philanthropic  and  r^oimcxs.  Among 
tltt  nmedks  or  partial  remedies  suggested  are  socialism, 
old-age  pensions,  compulsory  workmen's  insurance,  regu- 
lation of  hours  of  labor,  better  housing,  abolition  of  disease, 
education  in  tbarift,  profit-sharing,  codperaticm,  moiwpo- 
lurition  and  regulation  of  labor  by  in.  \t  unions. 

At  the  opposite  extreme  lie  the  oi/posite  dangers  and 
evils  of  great  wealth.  If  the  poor  are  too  hard  working, 
the  rich  are  too  idle.  If  the  poor  are  underfed,  the  ridi  are 
o^'eried.  If  the  poor  have  the  discomforts  of  squalor  and 
shabbiness,  the  rich  have  the  discomforts  of  excessive 
attention  to  pers(»ial  appearance.   If  the  poor  suffor  frcHD 


4f6  mtMMMmJoet  nmcaut  <»  looiwaM  (Cur.  xxvi 


owaaowSaag,  tbe  ridi  raffer  from  the  burden  of  overgrown 
ettabUahments.  If  the  poor  drink  alcohdici  to  frt  lid  of 
^gue,  the  rich  drink  them  to  get  rid  of  ennui. 

Not  only  does  each  extreme  have  its  evils  and  dangers, 
but  theuneqaal  diitributkm  of  wealth  has  evik  and  dangers 
of  Its  own.  Qm  of  these  is  the  ]>erverted  use  <rf  graat 
wetJth  in  a  manner  to  humiliate,  degrade.  <>r  demoralize  the 
poor.  Unequal  distribution  of  wealth  produces  a  caste  f  cl- 
ing, breo^  contempt  for  the  noot  by  the  rich,  and  ei.»y 
of  the  rich  by  the  poor.  Corresponding  to  differences  in 
wealth  grow  up  differences  in  t  o  mode  of  living,  ec*  :ation, 
language,  and  manners,  differences  which  distinguish  the 
"gimtlenMn"  and  "tody"  from  the  common  herd,  and 
which  gradually  become  confused  with  innate  differeaccs, 
which  are  quite  another  matte-.  Aristocracies  are  aln  >st 
always  fu.uided  on  wealtu  and  are  therefore  ahnost  alv.  a 
on  ft  Um  bftttt.  TIwr  txe  undoi^tedly  wWc  differoi 
between  men.  If  so-called  aristocrat?  were  reaUy  all  the 
name  would  imply,  the  "  best  "  m  bo». . ,  mind,  anc  iieart, 
much  could  be  said  in  lavor  of  their  s^egati(»  fro  n  th  - 
''vttlgw"aowd,  Mid  the  development  from  tkem  <d  & 
better  race  of  mai.  B'  f  a  plutocratic  arist  racy  h  lued, 
not  on  what  men  are  in  theinselves,  hat  <m  what  thiiy  peaot 
outside  of  themselves. 

Because  of  the  differences  in  w«^.  the  mt  serve  the 
ridi.  The  relaiion  of  master  and  se;  is  i:  -in^ify  a 
ommierdal  relation.  It  also  repRnets  a  u-  =^imd  4i8a- 
enoe  in  caste. 

Probably  the  worrt  donoraliatiep  ^f  the  ,  >r,  po\. 
out  of  inequalities  A  wealth,  is  th.  prostitL        4  < 
daughters  of  the  poor  for  the  sons  of  he  rich.  -t  t 

f^dtata  of  prostitution  believe  that  ii ;  «sts  on  this  onoiaic 
bass.  Wm  th«  whim  itowi  tiaffic  most  sMpte  we  bhuni^ 
those  who  engage  i  it,  jat  m  for  drun  ^mess  most  peojde 
Uame  the  saloon  -eper  Doubtless  these  agents  have 
ttifar  ihtre  of  m<H-.  responsibility.    Vit  they  a  e  merely 


WXALXB  AJiD  WKLfA&Jt 


497 


the  hwtm  k  the  harfness.  Hie  demand  and  mpf^  ate 

the  inqwrtant  factors,  an  the  demand  and  supply  adae 
dmAy  because  of  the  unequal  distribution  of  wealth. 

.^ext  to  the  poor  selling  their  souls  comes  selling  their 
velM.  Bfftiiy  and  political  comqitioii  axe  kig^  dye  to 
.  iffe'-PTices  in  weajth.   In  a  democracy  we  have  the  ideal 

onu.  ions  for  ?uch  perverted  ses  of  wealth.  In  a  democ- 
f  ac,  two  great  powers,  the  power  of  the  baUot 

aad  Ike  pe««r  of  the  purse.  The  power  of  the  faaBoi  nata 
w?f'  -hfc  poor  because  of  their  ^  mbers.  The  po./er  of 
th'  ,  Tse  ^ts  with  the  rich.  ^^thing  could  be  more 
ni^ir  th  hat  the  uucrupulou.  opresentatives  ol  these 
i  f^-  ..^m  doulr  oontxive  to  get  together  for  Bntwl 
advaatag*     fhey      d  not  meet  directly.   The  perverted 

4iUtidan  intervenes  u«  a  broker.  Many  of  the  dty  govem- 
oMRts  of  the  United  States  exemplify  this  condition.  These 
politicians  make,  on  the  one  side,  a  business  of  omtn^hf 
the  votes  of  the  poor,  partly  by  bnbery,  partly  by  dispea^ 
ii^  "  charity,"  and  partly  b  t  mty  in  party  organiaap 
tioBs;  and,  on  the  other  dde  key  make  a  bwbess  <rf 
"  hakyag  tq> "  the  capitalists  w  -mt  frandiiaes  far  street 
-ailways,  water,  gas,  electric  telegraph  or  special 

tariff  legi^tion.  The  tmscrupui  ^talbt  finds  it  ad- 
vantageous to  pay  ton  to  the  pou^ioan,  either  by  actual 
brflbery  or  by  stock  in  corporations,  or  by  what  a  politician 
recently  called  "  honest  graft  "  in  the  form  of  '*  tips  "  or  in- 
side information  as  to  the  stock  market,  real  estate  transac- 
tions, etc.  Some  of  the  pditidans  in  oor  rtate  l^Uttiaea 
and  even  bi  our  national  Omgieia  «e  of  this  character. 
Some  are  avowed  or  secret  representatives  of  capital  or 
"the  interests";  others,  of  voters  or  "the  people."  In  this 
CMe  the  oooffict  between  jdutocta^  and  demoaacjrbeoomea 
more  direct  and  vi^l^.  But  it  ahmys  exists  and  wOl 
continue  to  exist,  in  scmie  form,  unless  one  of  the  two 
powers  shall  some  day  completely  vanquish  the  other. 
Bne  b  one  ol  the  great  practical  protdana     ^  cbi|r. 


498    ELEMENTARY  PXINCIPLSS  01  ECONOMICS  [Cutf .  XXVI 


1 3.  Doom  of  WmMIi  bdoioiw  to  the  OwBtr 

We  have  seen  several  of  the  evils  of  wealth,  and  in  partic- 
vlar  some  of  the  misiues  to  which  wealth  may  be  put.  We 
can  better  understand  the  nature  of  these  and  other 
uses  if  we  reemphasize  the  fact  that  wealth,  in  its  narrow 
sense,  does  not  include  the  most  predous  of  our  posses- 
skms,  oursdves.  The  evibcrf  wealth  conafathurgdy  hi  an  hi^ 
crease  of  external  wealth  at  the  sacrifice  of  what  may  he 
called  internal  wealth.  Emerson  said:  "Health  is  the 
first  wealth."  The  founder  of  Christianity  asked,  "  What 
shall  it  profit  a  man  if  heshaU  gab  the  whole  worid  and 
lose  his  own  soul?"  Many  a  millionaire  would  willing^ 
give  all  his  millions  for  youth,  health,  or  even  freedom  from 
pain.  Many  uses  of  external  wealth  practically  injure  our 
internal  wealth.  The  injury  may  be  physical  <x  moral  m 
both.  It  is  m  this  regard  especially  that  "  satisfactions," 
in  the  economic  sense,  fail  to  measure  real  welfare.  Indeed, 
as  r^ards  the  body,  we  may  classify  satisfactions  into  sdf- 
benefiting  and  self-injurioui.  Many  articles  of  wealth, 
though  possessing  commercial  value,  are  really  mjurious 
to  those  who  use  them.  In  some  cases  the  articles  of 
wwlth  referred  to  are  used  almost  exclusively  by  the  rich, 
in  others,  ahnostachuivdy  l^tlw  ponr.  AmoBf  cnmqpks 
of  self-mjurious  satisfactions  or  uses  of  wealth  are  the  con- 
sumption of  unwholesome  food  or  the  wearing  of  constrict- 
ing dothing  or  the  use  of  dwellings  injurious  to  the  health ; 
the  practice  of  imhygienk  or  inunml  amnsonents,  the  use 
of  narcotics,  such  as  opimn  in  China,  haiitt  in  TiwH«^ 
absmthe  in  France,  whisky  in  Ireland,  and  alcoholic  bev- 
erages in  wntem  civilization  generally.  These  may  be 
ca&dpervsrtMl  uses  of  wealth,  but  thqr  aie  my  oobhiiqii, 
80  common  as  to  give  commercial  value  in  millions  df  dol- 
lars to  disease-producing  food  factorie,  distilleries,  saloons 
dives,  gambling  houses,  low  dance  halls,  and  theaters, 
hwiiii  of  prostitmioo,  iauaanl  and  d«piidtai  ItaMon. 


Sac.  4] 


'  WEALTH  AND  WELFAXX 


499 


The  perverted  satisfactions  here  represented  are  cafiital- 
ized  like  any  other  satisfactions.  They  are  often  paraded 
to  show  how  wealthy  a  nation  is,  but  as  they  weaken 
the  stamina  cl  the  people  and  shorten  their  lives,  they 
really  lessen  its  satisfactions  in  the  end.  In  any  cxxa- 
plete  view  of  the  subject  they  should  be  recogidzed  as 
sources  of  national  weakness,  not  strength.  This  is  recog- 
nised in  the  great  tdoxm  movemcats — housing  nktm, 
temperance  reform,  and  the  movaneat  to  ■hoHih  the 
"  white-ilave  "  txaffic 

{  4.  Fonnt  of  Wealtii  Injuions  to  Socklif 

Other  evils  of  wealth  consist  in  its  use  by  one  person  to 
injure  another.  Just  as  we  classified  some  satisfactions  into 
penmially  benefidal  and  faajoxious,  to  other  utirfurtk— 
may  be  classified  into  socially  benefirial  and  injiaioas. 
Examples  of  socially  injurious  satisfactions  are  of  many 
kinds.  Robbery,  fraud,  embezzlement,  arson,  and  other 
criminal  acts  are  too  obvious  to  need  mon  than  mfmtioB, 
A  burglar's  "  jimmy  "  is  an  article  of  wealth,  bttt  H  atwr- 
theless  is  a  means  of  injury  to  society. 

Of  less  obvious  examples  one  is  the  e]q>kHtatioii  ol  gold 
arfjMtii^smhefr  ptoiart  dapteditoi  tj^aawnqr.  As  we 
htm  seen,  the  production  of  gold  at  a  sufficiently  rapid  rate 
tends  to  raise  prices.  Here  we  find  great  gold  fields,  stanq> 
miUs,  assay  and  smelting  works,  etc.,  standing  in  our  ac- 
oorats  as  faqxNrtaat  kom  of  sftdonal  ci^itaL  Ytt,  iHioi 
they  produce  fluctuations  and  uncertainty  in  our  m<Hietary 
standard,  they  are  injurious,  rather  than  beneficial,  to  the 
cmmtry.  While  th^  affcwd  means  and  (^^rtunities  tax 
thdr  individual  owners  and  opkiten  to  make  frwt  ptivitt 
fortunes,  they  do  not  enrich  a  nation  or  the  world ;  for  their 
^ect  is  merely  to  change  the  numbers  in  which  i»ices  are 
oa^nssed.  Thus,  much  of  the  labor  and  oqpital  inwstod 
fa  gold  wBbm  awy  bt  mid  t>  bt  tntWfy  mtid.  A  mmB 


SOO    ELEMENTARY  WUNOPLES  OF  KOttO^u^m  ICm».XW9ff 

amount  of  money  is  as  good  a  mediimi  of  eichange  as  a 
:  large  amount.  If  gold  flows  out  of  the  goldmlL  fast 
i   T""^  raise  prices,  the  result  is  social  harm  rather 

'   *?an  good,  Asturbmg  the  dl8triTmtfc«  of  wealth  ami  coiH 
tmuaUy  tendmg  to  precipitate  a  crisis. 

^SLf?"*  T^^"'"  ^^'^'^^  ^        often  made,  not  by  an 

SS^t!L'.'''''^'l'l'f^  ^  abstraction 

from  the  wodd's  wealth  for  his  benefit  In  addition  there 
IS  a  waste  of  xabor  in  mining.  When  gold  can  be  mofit. 
ably  mmed  far  m  excess  of  what  is  necessary  to  maintak  a 
«ostent  pncc  level,  tiie  gold  miner  is,  as  it  were,  robbing 
society  Thus,  even  the  most  genuine  gold  bride,  as  tS 
wbch  tiiereisno  thought  or  intent  to  defraud,  ma^  prove 
m  the  end  a  swindle.  '  ^ 

Other  «imples  of  socially  injurious  wealtii  are  such  nul- 
8anc«  as  the  "  smoke  nuisance, "  privy  vaults  in  a  dty,  a^ 
pests    of  vanous  kinds.    A  factory  whidi  defflet  the 
hous^ld  hnen  and  the  lungs  of  tiie  ndghborhood  is  not 
««rf«d  benefit.  If  all  tiie  injury  it  caused  could  accr^ 
toAe  fiM:toiy  owner,  hewoidd  pnt  hi  a  smdce  consumer,  or 
else  most  wiUingly  suffer  a  great  deduction  in  the  vtikii  of 
^Jn^,  Instead  he  causes  a  great  loss  of  value  thinly 
^  blackened  houses  and  an  injury,  never 
c^>M«ad  or  measured,  in  the  health  of  his  fdliwdtizens. 
Sudi  cases,  where  sodal  interests  and  individual  hiteiesta 
do  not^nin  patalld.  justify  legal  mterference.   We  amn^ 
«ow  nooftm  or  bad  sanitation  in  a  crowded  dty  merdv 
because  maigr  faidlviduals  want  the  "freedom"  to  have 
them,  nor  can  we  allow  freedom  oi  movonnt  mtkttmtt 
of  those  canying  infectious  diiMMW.^^^  *^ 


i  »•  «*  Werilfc  0Md  for  Sodd  Sindiy 

^S^^l^^  ''^y  ^i'^o^  «««  of  wealth 
^^^nmUm  an  aU  cases  of  sodal  rivaliy  or  xadbc 
nam  mmi  hi  mum  wlB  be  ( — — ■ 


HEALIS  AMD  WEUMM 


The  first  relates  to  warfare  and  the  preparatkm  lor  wtr. 
It  is  nsoaSy  ooiMceded  that  actual  warfare  is  economifally 

injurious.  The  best  that  the  apologists  for  war  can  say 
is  that  it  is  inevitable.   But  it  is  not  so  well  recognized 
that  the  economic  preparation  for  war  is  an  example  of 
vorid  waste,  albeit  an  dfort  toward  economy  on  the  part  of 
each  individual  nation.  When  Germany  invested  millions  in 
armaments,  she  merely  stimulated  France  to  do  the  same. 
The  two  nations  have  been  racing  with  eadi  oAar  vm 
since,  as  hKvt  o^er  coontries,  including  England  and  the 
United  States.  Each  battleship  which  costs  $12,000,000  in 
the  end  adds  practically  nothmg  to  the  world's  effective 
capital.  Its  object  is  to  benefit  one  nation  by  increaii^i 
its  military  strength  relatively  to  other  nations.    But  it 
does  not  even  accomplish  this  object.    On  the  contrary, 
as  soon  as  this  movement  is  met  by  the  other  rival  nations 
and  a  similar  battleship  is  added  to  their  atvies  tSl  the 
advantage  wtidt  it  was  sought  to  gain  is  lost  again 
the  variovis  nations  are  in  precisely  the  same  relative  posi- 
tion as  before  any  battleships  were  built  at  alL  Prqiara- 
tion  for  war  is  a  species  of  cnttfaroat  conqietitioii.  ff  rix 
wodd  poweis,  instead  d  faivesting  each  $12,000,000  in  a 
battleship,  should  agree  not  to  do  so,  the  result  would  be 
to  save  $72,000,000  from  being  wasted.   The  case  would 
be  very  different  if  the  ships  bdonged  to  ^  mmtAaaA 
In  that  case,  the  building  of  $72,000,000  worth 
of  ships  would  add  that  much  to  the  world's  productive 
cai»tal.  The  utility  of  merchant  ships  is  absolute,  that  ol 
battleships  is  relative. 

Tkns,  lor  the  most  part,  tbt "  ca|>ital "  of  nations,  hi  the 
form  of  armaments,  represents  economic  waste,  although 
no  one  nation  could  afford  to  diqiense  with  it  as  long  as 
other  nations  do  not 

Our  second  mfff^  of  tocttUy  injurious  rivalry  is  am- 
rp^»^  cutthroat  competition.  We  have  seen  that  what  is 
flftm  to  the  intecests  of  individual  producers  b  agpinst  the 


■ 


»6 


SOa    ELEMENTARY  PWNOPLES  OF  ECONOMICS  (Cbav.XXVI 

common  interests  of  producers  as  a  groiq>.  We  may  now 
add  that  it  may  be  injurious  to  the  interests  of  society  as  a 
who^  In  fact,  we  have  already  noted  that  a  patent  and 
copyright  have  their  justificatioa  In  the  fact  that  the  play 
of  unprotected  individual  interests  would  piacticaDy 
stOtin  discouraging  or  suppressing  inventions  and  books. 
Tht  same  must  often  be  true  in  other  instances.  Tele- 
phone competition  is  not  only  injurious  to  the  telephone 
compames  but  to  each  subscriber,  who  either  has  tohKW 
two  or  more  telephones  in  his  house,  with  aU  the  expense 
and  anoyance  which  that  arrangement  implies,  or  has  to 
remain  m  want  of  proper  and  easy  connection  with  sub- 
scnbers  to  systems  other  tiian  the  one  he  happens  to  emidoy 
Our  tiurd  example  of  sociaUy  injurious  rivalry  is  perhaps 
the  moat  important  and  pervasive,  although  tiie  most 
subUe,  of  alL  It  concerns  rivalry  in  wealth  itself,  and 
mtroduces  us  to  the  subjects  of  luxury,  extravagance,  wodtl 
ambitwn^d  vanity.   Thackeray's  novel,  "  Vanity  Fair  " 
V  the  sort  of  economic  rivalry  referred  t^. 

Vanity  may  be  defined  as  a  desire  to  obtain  the  ap- 
proval  of  others,  and  vanity  leads  to  social  rivalry.  lS 
may  be  considered  as  ratiier  a  broad  definition  of  vanity, 
,  .  '^^ays  or  necessarily  imply 

any  slur  The  mjportant  part  played  by  vanity  m  eoo- 
nomic  affaus  is  seldom  realized.  A  case  of  pure  vanity 
wseen  when  a  man  wants  merely  the  badges  of  distinc 

t?^'  °^        Legion  of  Honor 

which  Napoleon  estabUthed  in  Fn»ce  is  much  desired 
merely  as  a  means  of  obtaining  tiie  approval  ol  oChe^ 
u^-^  desirabiUty.    It  is  not  be- 

aM«ttfc  beautiful  that  it  is  desired;  it  is  not  because 
rJ:n^  can  keep  one  wann  or  appeaae  one's  hunger  or 
fulfill  any  of  tiie  primitive  and  individual  desire,  dfmen. 
Itm»dbr  aH)eals  to  tiie  instinct  to  attain  distinction  in  tiie 
ot  ottCT  people.  Most  cases  of  vanity,  however,  are  not 
»  p»u»,  hot  ait  intod  witii  •  iiArtiatam  <>f  actual  utiHty. 


WBALIB  AMD  WXUAU 


S03 


For  instance,  a  dfaynond  is  dabti  dbieBy  out  of  motives  of 

vanity,  but  it  is  desired  also  because  it  appeals  to  the  «»• 
thetic  sense.  It  is  a  curious  fact  that  as  soon  as  we  mix 
vanity  with  some  other  motive,  people  begin  to  hide  behind 
tins  other  motive  and  omceal  the  vanity  of  ndik^  for  some 
reason,  they  seem  to  be  ashamed.  When  a  woman  wears  a 
diamond  hatpin,  and  can  never,  by  virtue  of  its  position,  see 
it  herself,  what  real  motive  is  there  except  vanity  ?  Of  oonne 
it  i^sy  be  said  that  she  is  an  altndst  m  attempting  to  pro- 
vide an  article  of  beauty  for  other  people  to  admire ;  but 
the  real  object,  however  she  may  condone  or  conceal  it,  is 
to  dwyVy  this  diamond  to  other  people  and  to  show  thefdby 
that  die  is  in  the  faddkn  or  leading  it  and  able  financially 
to  do  so.  Most  articles  of  ornament  pander  chiefly  to  this 
form  of  vanity  and  come  into  existence  largely  and  chiefly 
for  this  reason,  although  the  admiration  of  actaal  beauty  h 
a  leoon^ay  dement  mad  a  sfdMerfi^ 

The  amusonents  of  mankind  are  almost  always,  or  to  a 
large  extent,  mixed  with  the  motive  of  vanity.  For  in- 
stance, automobiling  to-day  is  not  always  indulged  in  for 
the  sake  of  sport  ah»e,  htA  also  for  the  sake  of  display. 
Equipages  have  always  been  one  of  the  means  of  displaying 
wealth.  Narcotics  have  always  been  objects  desired  not 
merely  for  their  drug  effect,  but  also  i<a  the  effect  (rf  di^lay. 
Tte  habit  of  udng  "fine  wines"  an  expemdve  drinks  in 
entertaining  has  long  been  one  of  the  methods  of  social  dis- 
play. Clothing  even,  and  housing,  are  very  often  objects  of 
vanity.  In  fact,  historically,  clothing  originated  m  era*' 
mei^  Kke  )ewdiy,  rather  than  as  an  actual  protection  from 
the  weather.  Even  food  is  a  matter  of  vanity  to  a  certain 
extent.  Feasts  have  been  favorite  occasions  for  the  exer- 
cise of  this  instinct. 

A  fnr  mrfnmt  onafiles  of  oatentation  nii  Mp  us  to 
understand  the  nature  of  vanity.  Some  years  ago  there 
was  an  American  in  Florence  who  carried  the  idea  d  di»> 
play  in  his  equ^>age  to  the  extreme  of  getting  a  dbttiot  iMl 


S04    ELEMENTAay  PlUNCttLtd  Of  COOStOMICS  tCur.ttVI 

having  sixteen  horses  to  pull  hfai  throu^  the  namnr  rtweti 

of  the  city.   Ordinarily  an  attempt  to  gratify  vanity  re- 
«xlt8  mthe^proval  which  is  sought  by  the  individual 
J  ™  «nw»CMes  tte  this  it  often  results  in  diaapprovaL 
and  this  man  was  known  in  FloreMe  for  yearTiB^' that 

fool  American."  A  well-kno^vTi  French  count,  who  through 
marriage  became  possessed  u  means,  gratified  the  instinrts 
Of  VMity  by  proceeding  to  ^end  untold  sums  in  building 

th^.    "^^Tf"^"^        ^p^y  toX; 

that  he  was  able  to  do  so.   A  person  not  long  ago  left  a 
mUproviding  $1,000,000  for  the  erection  of  his  own  tomb. 
Cleopite*  onee  akowed  whst  she  could  afford  by  rtrininVy 
a  dissolved  pearl.    Pliny  states  that  after  OmtaTm 
this  she  was  imitated  by  the  son  of  a  famous  actor,  and 
the  pracUce  of  drinking  pearls  became  a  sort  of  fashion 
&  Kom^  as  to-day  some  men  of  a  less  subtle  vanity  light 
2P»  ^th  Is  bills.    It  was  probably  this  practice  irtSdi 
led  to  the  phrase  "money  to  bum."  In  Philadelphia  not 
vwy  long  a^  a  lady  had  a  carpet  made  with  a  special 
d«ign  and  idien  the  caipet  was  completed  she  was  care- 
Jul  to  have  the  design  destroyed  lest  any  one  else  shoidd 
have  a  carpet  like  hers.   A  well-knowA  speculator  is  said  to 
have  bought  for  his  wife  for  $30,000  a  particular  carnation, 
in  Older  that  ft  might  be  called  by  her  name.  InHolland 
centuries  ago,  there  was  a  furor  over  tulm  buflbs  whidi 
took  such  a  hold  on  the  people  and  led  to  such  ectrava- 
ganUy  high  pnces  that  in  1639  one  bulb  sold  for  wiiat 
would  be  aijproximately  $3000  in  our  money. 

The  powerful  influence  of  vanity  h  illustrated  hy  the  ad- 
miration people  have  for  foreign  importations.  Many  people 
really  ddude  themselves  with  the  idea  that  they  care  f^  an 
toported  dgar  or  wine  because  they  believe  it  to  be  superior 
to  the  domestic  article.  Nor  is  this  the  oi^  ipedet  of 
^ty  appeased  by  the  purchase  of  foreign  goods.  An  art 
Jaler  hi  San  Frandaco  found  that  certain  people  preferred 
to  pijf  C4000  a  Fails  for  the  same  picture  which  they  could 


8k.  si 


WIALTB  AND  WELT  AKS 


In^  in  Sta  Vnmdaco  for  $3000,  in  order  that  they  mi^ 
state  that  theybought  it  in  Paris.  Some  artists  of  San  Fran- 
daco  found  it  advisable,  therefore,  to  take  their  pictures  to 
Paris,  in  order  that  they  might  get  higher  pikes  from 
AnNricaas.  California  wines  go  to  E  .  -  ^  be  returned 
as  "imported"  wines.  Not  long  a  i  American  who 
lives  in  a  well-known  cheese-making  ais.  ^ct  in  New  York 
paid  a  very  high  price  for  an  inq^orted  cheese  and  took 
gnat  ddi^t  in  the  fact  that  it  was  inqtorted.  As  a  mat- 
ter of  fact,  it  had  first  been  exported  from  his  own  town. 
New  York  dgars  are  shipped  to  Key  West  to  be  reshipped 
from  there  as  "  Key  West "  cigars. 

The  effort  to  produce  imitations  is  found  in  the  case  of 
afanost  all  articles  of  vanity,  though  the  supsriority  of  the 
"  genuine  article  "  is  strenuously  maintained.  This  is  well 
illustrated  in  jewehy.  A  paste  indtetkm  oC  a  diamond  can 
never  htiSk  the  ame  price  as  a  real  diamond  except  when 
its  character  as  an  imitation  is  fraudulently  concealed. 
If  a  chemical  method  shouki  be  devebped  of  making  a  real 
diamond  cheaply,  the  desinbiSty  of  diamowfa  woaU  be 
destroyed;  they  would  immediately  go  out  of  fashion; 
the  invention  wouM  be  self-destructive,  and  the  price  of 
«««mm%Ha  and  the  use  of  diamonds  destroyed.  That  is, 
diamonds  are  desired  because  they  are  scarce  and  a  badge 
of  econonuc  power  of  the  people  who  possess  them.  This 
is  why  imitation  jewelry  is  regarded  as  a  sham.  Paste 
^fffiMMMl*  may  be  quite,  or  nearly,  as  beautiful  as  real 
^iamonda,  bat  theycan  new  be  aovalnalde.  Thami^ 
use  them  do  so  not  because  they  regard  them  as  beau- 
tiful, but  usually  in  order  to  make  people  believe  they  are 
'^real"  and  that  the  possessor  can  afford  iu  buy  thetu. 

tluy  mm  mtwn  m  tymbok  of  laal  dtaiTWndi  faot 

for  wf^  bk  bank  vaults.  The  ownen  thm  appear  at  the 
opera  with  the  imitation  jewels.  When  spoken  to  of  thdr 
jewdi,  tlMse  peq>le  will  say  that  they  are  not  real  jewels, 
tal  tt«  ta  esttct  initttkm  of  real  Jemli  iiM  tie  m 


S06    ELEMENTAKY  WUNOPLES  Of  ECONOMICS  CQUf.XXVI 


the  safe  deposit  vaults.  In  such  cases  the  imitotkm  jeweb 
purely  and  simply  as  badges  of  ownership.  There  it 
then  supposed  to  be  no  pretense  involved.  The  wearers 
would  be  thoug^it  "dieating*'  if  they  possessed  inUy  the 
IMste.^^  Their  virtue  consists  in  actuaUy  having  the  rad 
thmg,  which  the  paste  repUca  proclaims.  A  wealthy 
woman  seriously  argued  the  question  of  whether  a  poor 
woman  had  a  right  to  wear  an  imitation  diamond.  Efcr 
thought  was  that,  since  the  poor  person  could  not  dfotd 
to  have  a  real  diamond  to  wear,  the  imitatioo  diunmd 
amounted  to  deceit.  inrmi 


§  6.  Tte  Coit  of  VmI^ 

Now  the  efforts  to  satisfy  vanity  are  like  the  efforts  of 
nations  to  secure  aimaments.    The  chief  advantage  that 
soaal  racmg  gives  to  an  individual  is  relative  and  this  impUea 
putting  other  people  at  a  reUtive  disadvantage.   So  faVas 
society  is  ooncemed,  the  cost  of  keeping  up  the  race  is  a  total 
waste.  Thiscostcoiisfatsinthelaboretpcndedaithegrati- 
ficationof  vanity,  and  shows  itself  in  the  high  prioesof  artldet 
for  that  puipose.   The  tax  thus  laid  by  society  upon  itself  is 
enonnoos,  and  a  part  of  it  may  be  measured  roughly  by  the 
annual  purchases  of  articles  of  pure  vanlfy.  Yet  people 
s^om  complain,  for  the  individual  can  see  Ihde  or  no 
diffwence  between  the  good  he  gets  from  an  article  of 
vanity  and  the  good  he  gets  from  any  other  article.  He 
does  not  <»re  much  ^?x)ut  the  pace  he  may  be  setting  for 
others,  and  he  does  not  hold  any  other  particular  person 
orpersOTs  responsible  for  the  pace  which  has  been  set  for 
hta.    He  kxto  at  the  world's  fashion  as  an  inevitable 
fact,  and  adjusts  his  own  actions  to  it  Our  tttk,  howwer 
u  to  look  at  the  social  effects  of  hit  actions  on  odien,«id  of 
otters  actions  on  him.  His  expenditures  for  vanity  may 
gwWm^«ati«6u*ion  of  «  climbing."  but  by  as  much  L 
tefBtaaiwadolothentlMotlMnaftMtbdifaid.  Theyara 


aD  in  a  wdal  isce  to  get  ahead.  In  tibe  lOfttiible  ai  are  at 
great  effort  or  expense,  and  in  the  end  there  b  a  loss  of  eco- 
nomic power  similar  to  the  loss  by  nations  radng  for  military 
supremacy.  Undoubtedly  the  race  stimulates  the  racers, 
and  nay  do  them  tome  good  aa  a  mode  ct  eKereiiIng  tiiafar 
al^ties,  and  even  lead  to  useful  inventi<Hi8.  The  same 
maybe  said  of  war.  But  our  present  purpose  is  to  point 
out  the  cost,  which  is  usually  overlooked.  If  the  true  cost 
oould  be  eqxeiied  in  figures,  it  ivould  dovd)4]eia  amaae 
peofde  who  have  never  sto[^>ed  to  see  the  extent  to  which 
luxury  and  luxurious  rivabry  is  carried.  Almoit  all  expendi- 
ture is  more  or  less  colored  by  it. 

We  have  called  the  eztrnvagaace  idiidi  is  cnalad  by  ^ 
desire  of  a  man  ia  compete  with  his  neighbor  in  vanity 
social  racing.  Now  when  fashion  enters  into  the  matter, 
as  it  almost  always  does,  this  race  becomes  more  like  a 
dbia.  Thefe  an  leaders  and  fofiowcis,  and  the  ioioiini 
try  always  to  overtake  the  leaders.  When  they  do  so,  the 
leaders  turn  in  their  course  in  order  to  elude  their  pursuers. 
The  consequence  b  that  fashions  are  constantly  changing 
at  the  hands  of  the  leaden  of  fidiiQO.  The  leaden  of 
fashira  are  usually  from  among  the  richest  people  in  the 
conmumity,  and  whatever  they  consume,  those  beneath 
them  in  the  social  or  economic  scale  wish  to  consume  also. 

We  may  take,  m  an  cnmple,  the  caae  of  maaet  Aam, 
which  are  constantly  coming  in  and  going  out  of  fashi<m. 
A  few  years  ago  a  gentleman  was  surprised  to  find  that 
only  the  highest  grades  of  russet  shoes  were  carried  on  the 
maAet  When  ht  taktd  the  reason,  he  was  told  that  russet 
shoes  had  gone  out  of  fashion  only  a  year  or  two  before; 
that  now  they  were  coming  in,  and  the  only  way  by  which 
they  could  be  got  in  was  by  putting  the  highest  gI^kdes  tm 
^  BMriMt  firrt,  baawae  if  the  kwrest  and  cheapaat  gwiii 
were  put  on,  then  the  leaders  of  fashion  would  not  want 
them,  and  if  the  leaders  did  not  want  them,  then  followers 
would  not  want  them  either.    Consequently  the  demand  at 


So8    ELEMENTARY  PMNCIPLES  Of  XCOMOiaCS  lOUF.XXVI 

the  top  is  the  one  to  be  first  supphed.  After  this  initlitlmy 
demand  has  been  satisfied,  the  shoes  are  imitated  in  cheaper 
grades,  unta  finaUy  russet  shoes  become  so  common  that 
the  leaders  refuse  to  wear  them  longer  and  they  go  out  of 
fashion— only  to  come  back  agdn  in  a  Ifw  years,  after  wUch 
the  same  cycle  is  repeated. 

Vanity  is  UteraUy  insatiable.  Without  vanity  there 
would  be  UtUe  use  for  the  fortaiies  of  multimiUionaires. 
Beyond  a  modest  fortune  more  wealth  would  be  to  them 
entirely  superfluous.  Therefore  the  use  to  which  they  put 
ijeir  milUons  is  of  much  more  moment  to  sodety  than  to 
themselves.  If  they  use  it  to  set  staadanb  of  luxury,  they 
are  using  it  in  a  socially  injurious  manner.  They  produce 
the  same  effect  on  society  as  though  they  levied  a  tax  on 
all  persons  poorer  than  themselves. 

The  individual  can  emancipate  hhnseif  from  the  expense 
of  social  raang  by  asserting  his  independence  and  "  living 
the  simple  life  "regardless  of  his  neighbors  or  their  opinions 
of  Mm.  An  interesting  book  caUed  "  One  Way  Out "  de- 
scribes how  one  family  «  ran  away  bom  ha  neighbors  " 
m  order  to  start  life  afresh  in  a  lesa  expensive  environ- 
ment. By  such  a  step  the  cost  of  living  could  probaUv 
be  cut  in  two  or  reduced  in  an  even  greater  ratio. 

But  to  most  men  and  women  such  Spartan  measures 
would  seem  a  hardship  rather  than  a  saving.    For  them 
no  remedy  for  their  own  extravagance  would  be  adopted 
^Afch  did  1^  cany  with  it  a  remedy  for  the  extravagance 
of  their  neighbors  also. 

S  7-  SMMdiM  for  the  Bfito  of  Vaai^ 

We  have  seen  that  the  natural  remeify  for  cntthioat 
competition  in  business  is  combination.  In  the  same  ww 
tfttere  could  be  a  general  "disarmament,"  as  it  were  or 

S*^L^^  competitors,  it  might  solve 

Mt  fMMdem  of  social  livahy. 


lOAtia  AMD  MKAiS 


This  declaration  of  truce  has,  indeed,  been  ;  'it  in  opera- 
tioii  on  a  small  sctk  in  sdiods,  odicfSi,  and  dubs.  A 

good  instance  is  to  be  found  among  women's  sewing  cir- 
cles. When  such  a  circle  is  first  organized,  the  hostess 
gives  a  very  simple  entertainment.  At  the  next  meeting 
a  rival  hostess  gives  smnething  a  Uttle  mme  elaborate,  aiui 
presently  the  members  of  the  circle  are  madly  racing  in 
the  effort  to  supply  the  best  entertainment.  A  reaction 
becomes  necessary  and  the  ladies  finally  agree  ezididtly 
"  act  to  serve  more  than  two  kinds  of  aike." 

An  example  of  how  this  general  disarmament  works  was 
seen  in  San  Francisco  at  the  time  of  the  earthquake.  There 
the  people  who  lived  formerly  on  Nob  Hill  in  fine  houses 
had  to  live  in  teate  or  out  of  doom.  So  far  as  this  loss  was 
concerned,  it  was  no  loss  at  all —  at  any  rate,  no  loss  at 
first  —  because  each  man  was  perfectly  willing  and  liked  to 
Hve  out  of  doors,  provided  his  neighbor  lived  in  the  same 
way.  Yet  before  the  earthquake  aay  mat  <rf  tbese  people 
would  have  been  ashamed  to  live  in  a  tent  because  he  kaew 
that  his  neighbor  wotild  wonder  or  criticise. 

Very  similar  to  sodal  disarmament  is  compuLuon  by  the 
govemmmt.  The  Dutch  government,  for  the  sake  of  the 
nation's  resources,  finally  took  a  hand  in  the  tulip  craze,  and 
the  traffic  in  bulbs  was  stopped.  History  contains  many 
examples  ci  sumptuary  laws  daiffud  to  dheck  sodal  radng. 

One  cure  was  suggested  by  John  Rae  (a  Scotch  eoooomisl 
writing  in  1834)  which  is  ingenious,  although  it  has  never 
been  consdously  put  into  use.  He  says,  and  wisely,  that 
we  cannot  change  this  inherent  andbitkn  in  human  nattire. 
All  we  can  do  n  to  turn  it  to  9om»  good  account  instead  ot 
letting  it  nm  to  waste.  He  suggested  that  sodal  radng 
could  be  made  to  yield  a  revenue  to  a  government  by  tax- 
ing imported  horarfes  to  ^  to  mtko  than  ctpcMtve,  asd 
therefore  desired  by  the  wealthy  and  out  of  the  reach  of 
their  imitators.  A  case  in  point  is  that  of  the  cheap  wines 
of  France  being  dear  in  England  because  of  the  tariff  and 


ooit  ol  importatfcm  acron  the  duunel,  and  reverady  the 
ch«tp  ^es  in  England  being  dear  in  RMcTSS'im 
^  the  country  of  the  other,  but  unfiSiaZ 

wmy,  ttrough  makii«  u  article  eidurive,  the  government 
^  get  a  revenue  by  creating  a  fashion,  and  tiie  tMTto- 
po^on  sodety  by  ImIuoh  could  thua  limJeW2«S 
to  the  government 
Another  way  it  to  change  the  faskkm  of  fashion,  to  to 

Sl^^  ?^iL"l^*  seeks  to  make  a 

record  of  power  mthefinaacWirorid.  In  these  days  a  man 
may  advertise  his  wealth  in  other  ways  than  ^  ^ 
To  be  known  as  the  largest  stockholder  in  a  nuW  fa^ 
of  the  coveted  distinctions.    Again,  by  pubUsh^^aZ 
and  amountt  contribut^i,  the  nSm^'^ve^sti^cT*^ 
to  the  large  contributors  to  chanTTlt  b  ii^  Ibw^^ 
th^re  money  can  usuaUy  be  raised  by  a  pubHc^ 
'^mm  &t  than  by  a  church  coUection,  where  the  con- 
nbutor  ohtams  no  puhBc  notice.  The  publicity  of  ^ 
lists  even  stmulates  a  desire,  though  still  weak  it  k  t.^ 
to  have  one's  name  near  the  top  of  the  tax  list  Priv^e 
ditp^y  it  alto  taking  on  healthier  formT  ^e  ^aiX 
Amenom  is  distinguidnng  Mmtelf  by  buying^or  Jof  ^ 
and  loanmg  them  to  the  great  art  g^Ueiiet  Eimme 

^^'^S^^'^  There  was  a  time  when 
m«i  bedecked  tiiemselves  in  diamonds  and  eipeDiivet^ 

B^L^iSS^".''"^'  jewehyor  ^ISydothing. 
Butinett  <&tiBctx»  takes  the  place  of  tinse. 

r^^S'-^^T*  "T?^  to  lead  in  other  ways 
m    soaet^      ^ey  seek  distinction  in  tiieirwome^tduha 

There  is,  as  a  m^ 
«  MCT,  BO  lemwhy  nch  men  and  women  shouM  not  try 


WIALn  Um  WBCMBC 


to  distinguish  themselves  by  ddng  good,  and  the  tendency 
in  America  to^lay  is  exactly  in  this  Hw.  Rkk  meii  an 
gradually  trying  to  distinguish  tbuaMiiii  by  tbeir  large 
benefactions  instead  of  by  their  large  e]q)enditure8.  They 
create  great  philanthropic  foundations  and  endow  hosfutals, 
sanatoria,  libraries,  and  univeraitfei.  A  few  ycaxs  ago,  in 
the  dty  of  Pittsburg,  two  wealthy  men  vied  with  each 
otiier  hi  erecting  fine  buildings  for  the  good  of  the  dty 
oi  Pittsburg,  and  one,  in  order  to  triumi^  over  the  other, 
wbo  had  put  up  imposing  buildings  in  a  certain  aqiaae, 
purdiased  the  aqnan  immediately  adjacent  at  a  very  high 
price  for  the  purpose  of  erecting  a  still  finer  public  building. 

Social  racing  of  this  sort  may  be  socially  beaefidal  and 
lb  an  CDcouraging  sign  of  the  times.  At  pfctent,  bowevcr, 
peat  weiMl  is  as  a  role  cither  running  to  waste  m  taxing 
those  Tiho  cannot  keep  up  with  it.  Perhaps  some  day  it 
may  —  like  other  great  wastes  —  be  caught  and  hamfssfid 
aad  made  to  do  ame  of  the  worid^  wodu 

We  have  acv>  j^^tapleted  our  brief  review  of  ^  dsmsntary 

IMincq>les  oi «  ...  u<^^  ruics,  or  the  study  oi  ^vcaltJi .  It  has  fallen 
under  three  heads:  (i)  the  " foiTr/^lai ior^  f  ones,"  (2)  the 
determinatioa  of  prices,  and  (3)  the  p  of  distributi<m. 

Slider  tfMi  inrt  head  woe  set  forth  the  peat  coDcq>ts  of 
the  sdence,  nameh'^  wealth  itseli  the  central  theme,  and  the 
dosdy  connected  i  :(>ncepts  of  piopert>  ,  benefits  and  costs, 
price  and  value,  i^pital  and  income.  We  saw  how  these 
coaoeptsMedBfaied,  SBd,  n^st  ismorefaf^Mctsst,  how  ^bt^ 
are  related  to  each  otho*.  In  particular,  we  new  tiuit  prop- 
erty ri^ts  always  have  a  basis  in  tangible  wealth  or  persons ; 
that  wealth  k  a  means,  and  property  a  right,  to  future  bene- 
fits sad  costs;  wbA  that  Aose  pnsent  vahMtSons  csBsd 
**  capitol "  are  the  net  discounted  ^iteiB  of  Mtts  hMito 
1ms  costs  *f^H  net "  iBGOsse." 


5za  sLXMKNXAnr  mncDRn  or  ioomoiiics  {Ck*r.xzvi 


These  nbtioiii  ireie  found  to  be  illustrated  by  the 
principles  of  accounting.    We  found  two  methods  of  com- 
bining different  accounts,  whether  of  capital  or  of  income. 
By  the  method  of  balances  we  saw  what  part  of  capital 
or  income  belonged  to  the  particular  person  or  wealth  to 
which  the  sq>arate  accounts  relate ;  whereas,  by  the  method 
of  couples,  we  saw  wherein  the  final  total  capital  or  income 
consists.    The  method  of  couples,  when  all  accounts  of 
society  are  inchided,  brings  us  back  to  the  fundamental 
truth  that  capital  consists  of  concrete,  physical  objects 
(including  in  its  broader  sense  human  beings)  and  that  in- 
come consists  of  final  satisfactions.    The  "couples "  which 
finally  cancel  themselves  out  are,  however,  for  the  indi- 
vidual accounts,  very  important    They  are,  for  capital 
accounts,  the  debts  between  man  and  man  and,  for  income 
accounts,  the  interactions  between  instrument  and  instru- 
ment. 

We  found  a  fundamental  relation  between  the  varia- 
tions in  the  income  from  any  species  of  capital  and  the 
variations  in  the  value  of  that  income;  namely,  that  if  the 
income  realized  exceeds  the  interest  accrued,  the  capital 
will  depreciate  by  the  difference;  and,  reversely,  if  the 
mcome  realized  faUs  short  of  the  interest  accrued,  the  capi- 
tal will  appreciate  by  the  difference. 

Our  second  task  grew  out  of  the  fim.  The  formal  con- 
cepts and  relations  had  furnished  us  tools  of  thought,  but 
they  had  not  explained  the  facts  with  which  they  dealt. 
They  had  shown  us  what  prices  and  values  are,  but  not  how 
they  are  determined.  The  determhiatfcm  of  prices  thus  be- 
came next  the  focal  point  of  study.  We  found  the  problem  of 
price-determination  to  be  twofold,  —  the  problem  of  deter- 
mining price  levels  and  the  problem  of  determinmg  individual 
prit^.  The  former  » the  ptoUem  <rf  the  purdiasing  power 
of  money,  and  depends,  for  its  solution,  on  the  study  of  the 
"equation  of  exchange."  We  found  that  the  price  level 
IS  normally  proportional  to  the  quantity  of  money,  and  iii> 


813 


vendy  proportional  to  the  volume  of  trade;  it  was  also 
noted  that  the  vdmne  of  dqxMits  lubject  to  dneck  (nkr 
tively  to  the  mon^  in  circulation)  and  the  velocities  of  cir- 
culation of  money  and  of  deposits  are  important  factors  in 
the  problem,  and  that  the  disturbance  of  the  normal  condi- 
tion oi  the  magnitudes  in  the  equatkm  ol  cnhange  hat  modi 
to  do  with  periodical  crises  and  dqnrenions  of  trade.  The 
other  problem  (individual  prices)  was  again  subdivided  into 
two,  the  one  relating  to  the  prices  of  individual  goods,  and 
the  other  to  the  rate  (rf  interest  Theddrf  keytothe  fint 
was  found  in  "marginal  desirability,"  and  to  the  second, 
in  "  marginal  impatieuce,"  or  excess  of  the  desirability  of  a 
present  dollar  over  the  desirability  of  a  future  dollar. 

Having  seen  the  principles  whidi  ruk  Uie  maricets  of  the 
world,  we  were  ready  for  oui  third  and  last  task,  —  to  study 
the  larger  results  of  these  forces  on  the  distribution  of  in- 
come, relatively  to  its  sources  and  owners.  We  found  that 
the  dstributioii  ci  income  according  to  sources  Id  hito 
several  parts,  differing  in  mode  of  measurement  aad  ia 
degree  of  certainty.  These  parts  may  be  simunarized  as : 
profits  (whether  the  profits  are  from  capital  or  work  or 
both),  capitalists'  sHpulM  Incmm  (niiether  kteicst  or 
rent)  and  labor's  stipuiatal  income  (wages). 

The  distribution  by  owners  we  found  depends  on  in- 
heritance constantly  modified  by  thrift,  abiUty,  industry, 
luck,  and  fraud.  Tht  topic  ol  distributkm  by  owners 
led  to  a  consideration  of  the  effects  of  the  oiimeirii^  of 
wealth  on  social  welfare. 

Throughout  the  book  we  have  confined  ourselves  to  the 
study  of  prindi^  —  the  prfaidples  yMch  and 
income  are  related,  the  principles  by  which  prices  are  fixed, 
the  principles  by  which  wealtii  or  poverty  is  produced,  the 
princq>les  by  which  men  and  women  waste  wealth  in  useless 
ihmby.  The  wlioie  stii^  has  been,  as  a  study  of  leisBtffic 
l»indples  should  be,  cold  and  impartial.  The  practical 
appMcatioa  of  the  princ^^  was  not  inchided,  and  the  sto> 
tl. 


514     KLEMENTARY  FXINaPUS  QT  KCONOIOCS  (Cmt.  XXVI 


dent  was  warned  at  the  outset  against  taking  aiy  partiMii 

position  on  economic  questions  until  he  had  some  ground- 
ing in  economic  principles.  Now,  however,  that  he  has 
rtodied  these  prnidples,  he  is  stronc^  advised  to  continue 
the  subject  in  other  books  devoted  to  pucticsl  sfiplirBlhiM 
The  chief  use  of  a  study  of  principles  is  as  a  proration  for 
the  study  of  their  application;  and,  unless  educated  men 
use  their  knoidedge  <A  principles  as  a  means  of  influencing 
public  ofunioii  on  economic  problems,  the  solution  of  these 
problems  will  be  left  to  those  who  neither  imderstand  nor 
recognize  the  existence  of  any  economic  principles.  Every 
educated  man  owes  it  to  the  community  to  tise  his  education 
for  intelligent  leadership.  To-day  is  a  time  of  reform  move- 
ments, and  never  before  was  there  greater  need  of  intelligent 
leadershq)  in  those  movements.   This  book  will  not  have 
fulfilled  its  fuBctioii  if  it  does  not  induce  the  readers  to 
apply  its  principles  to  thefr  own  Sves  and  to  the  life  of  the 
nation  of  which  their  lives  are  a  part.   Its  chief  object  is  to 
put  them  in  a  positicm  to  study  and  help  solve  the  great  prob- 
lems of  money,  tar^  trusts,  faibor  unions,  hours  of  labor, 
housing  and  hygiene,  and,  above  afl,  the  {noblems  oi  wealth 
and  poverty.   These  are  great  problems  and  it  will  be  well 
wcHTth  the  reader's  while  to  take  up  some  am  of  them  for 
thorouf^  study.   Ht  wS  M  ftirt  su^  a  tiMfy  wm  ktd 
him  into  ever  broadening  fiekb  el  human  Interest.    In  ktA, 
practical  eommnic  problems  are  seldom  restricted  to  eco- 
nomics proper,  but  lead  into  the  great  realms  of  kw, 
poBtka,  aad  Mils.   TMi  fa  Immm  waotmkB  ktn^tm 


INDEX 


Ability,  influenct  W 
wealth,  481. 

Abrasion,  losses  of  gold  coin  by,  212,  314- 

Accounting,  capital,  principles  of,  39-59; 
distinction  between  that  of  real  and 
that  of  fictitious  persons,  so-51; 
income  accounting,  64-68;  corrtc- 
tion  of  irregulariUes  in  net  income  by 
depreciation  fund  and  other  devices, 
67-69;  how  to  credit  and  debit  in, 
69-7* ;  risk  of  (Hnissions  and  «Mn  fat 
income  accounting,  73-74- 

Accumulated  products,  the  factor  of,  in 
determining  wealth  of  a  naticHi,  468, 
469- 

Accumulation  of  capit^,  a  comBttoi 
aflecting  volume  of 
prices,  19a,  193- 

Accuracy,  limit  of.  fai 
RMBts,  M-aa. 

Alcoholic  beverages,  impairaMBt  of 
labontt'  vitality  by,  446;  an  illustra- 
tion of  the  iaituious  use  of  wealth,  498- 

Amount  msfkctfri,  definiticm,  MS. 

Amount  of  iacoaM,  influence  of,  on  impa- 
titnce  and  the  rate  of  interest,  j8i  fl. 

Antitnat  movement,  oectaia  tuiMomic 
coadWons  overiookrU  by,  ia  akainf  to 
compel  competitios.  is». 

Appraisal.  dofinlUon,  U;  lirit  «(  accu- 
racy in  determiiiiag  price  by,  ai-aa 

Appredatloa  of  caplUl-vahM,  <MaM 
lt«,  IM 

Apprentice  syitM^^^^^laMatiMi^^  «<. 

AfH^fM^'iaMtioo.nt:  ilnillMiiiii  of 
buiinCM  of,  iit-SSS ; 
AttlnctluM 


Aristophanes,  a 

am's  Law,  asi 
Armamentit 

ous  use  of 
Article  of  wealth. 
Arts, 

sag,  aia 

itaoaeinthe,  SX4- 
Askiiig  price,  1$. 
Asaata,  dWmitinn,  fli 

efoct  of  Mttam 

ion  of,  ia  Mri 
of,  belov 
iaaolvency,  48-49: 
alow,  de&iitioo, 
tkm  of,  to  UafaUKiM  fat  caaif 


in  balance  aheeU  of  balH^  iM  ft; 
cadi,  in  boaldnc.  aujr  k« 
UHtiM.  lyt;  hKb    mtk  dtm  fegr 
Itabaite  af  lyisw  mm  Im  im  * 

moit  bo  ndi  w  1 
pcaaqi^,  i74rtf§. 
Attf&olM  «f  writt.  Mr  « ) 


AutocndM 
views  0^ 

AvemcCi 
trend  of 
by  an.  a49-as3< 


«7«- 

Balaace  of  trade, 
awl"uBf*vqrahk."8; 
oa  qoaattty  of 


"uafavotafalB"  ani 
GonceptioB,  iff. 


INDBX 


BaUnces,  method  of:  in  oambUwcuii 
UlKoouau.  51-54:  fmStSkZ^ 

lolve  problem  of  doubit  tasatian  (8- 
appUcation  of,  to  incoM  accovttiu' 
75;  usefulncM  of,  la  ihcwtarofwhirt 
elements  income  cvuitu.  89-90- 
analogy  of,  in  income  ««<»iBrim.  with 
in  capital  accountiiigr»»-o7^ 
Balance  iheet,  definiUon. «;  d  to 

e^Jain  arodating  credit,  iM^  167  f. 
Bank  check!.  148;  eiplaMtfaa  of  dam 
of  arculatinK  credit  -ri|iiniiii|  by 
165  ff. ;  daiMs  whicli  mate  «e  of' 
i8i,  i«a ;  uie  of,  fadMaiM  rrliwili  of 
arculatioo,  199.  ' 
Bank  depoika,  «  one  da-  af  cwiency. 
'48;  eJtpUnaUon  of  daia  of  cwrency 
represented  by,  165-171;  (Mm  ef 
by  cash  rMcrvei,  i76-t7>;  «e  mm- 
raally  pnqiortionai  to  Beaay,  tto-itt  • 
disturbinc  affect  of  tTMiitka  Mriodi 
M  ratio  betireen  mowry  tmi,  ^^-185  ■ 
effect  on  velocity  of,  ef  baUli  of  faKli- 
viduals,  systems  of  r  oill,,  dmity 
of  population,  and  n^MI^  if  tnu»- 
portation,  196-202. 
Banking  systems,  character  of.  a  condi- 
tion affecung  vdume  of  trade  and 
prices,  iQs ;  iiAtence  of,  on  volume  of 


definite  ratio 


deposit  currency  and  on 
Bank  notes,  a  drculating 

money,   148;    »  (00^ 

money.  149;  <Merence 

depoMts  and,  166;  def( 

•o<«emnient.  177-178. 
Bank  reserves.  i76-i7«.  «™„  ratJc 

Halved  between  b^k  depodu  and 

of  mter«t  mi.  ^0^;  p«to«io„ 
403. 

' <*-so;  cBuan  0^  b  iaaa- 

dalcrne*.  i87-i8g. 

fcuki.  dwfiptiM  of  buaineiaof,  163  ff 
pntcmaly  coMtdered  as  coitoiMlv 
institntiops  operated  for  dipMiiar) 
at  a  certain  stage  yield  fcipaaMKtv 
to  SockhoWers.  173-174;  fariMions 
on  business  of,  dictated  mducc 
•«1  so«ind  poBcy,  174-171 ;  iamO- 
oency  of  cash,  175-176;  a  cadi  te- 
servt    ,-fv-,7S     pojition  of,  during 
transitwn  petW*.  185  ff 


of  circulation  of  EuropM^  1 
of  population.  201. 
Barter,  definition,  II,  151. 
Battleships,  eccmomic  waste  of.  sot 
Bears,  definition,  8M 
Benefits  of  wealth,  the.  23  ff.;  rendered 
by  free  human  beings  are  called  "ser- 
vices" or  "work,"  by  thing,  are  called 
a3-a4;  definition,  14;  meas- 
uremait  of,  24-25 :  coaU  of  wedth  tfat 
oppo«te  of.  25-26;  property  diffwd 
as  the  nght  to  enjoy  the,  27. 
Bequests,  rights  and  limiutiona  of  »« 
401-493;   iUustrationa  of  aeciimida! 
tion  of  interert  by,  4M. 
Bidding  price,  15. 

Bimetallism,  definition,  SSS-SS4  •  apoli 
cation  of  Gresham's  Law  to.  a'lA-Vit- 
conditions  leading  to  failure  of,  22*^ 
230;  conditions  leading  to  niecMa  oL 
«nd  prevention  of  complete  woiUnc 
out  of  Gresham's  Law.  230-23^7 
changes  in  prwi  action  and  consuap. 
tion  of  tfc^fpwdoua  mctala  under,  139- 

of.  23s 

Birth  rate,  adjustment  of,  to  amount  of 
per  capita  wealth,  473-474;  reduction 
of,  among  the  wealthy  helps  in  perpet- 
uating  inequaMtie.^  distribution,  483. 
Bondholders,  in  a  joint  stock  company. 
4«:  nature  at  investment  of,  as  to 
wety,  425-426;  distinction  betw«aa 
'"*«^  received  by,  and  wages  f. 
ceived  by  workmen,  439 ;  relatios  f" 
tween  employen  and 
analogous  to  that  I 
4S5,  457- 

Bonds,  caiculation  of  present  value  of 
^l^appKcation  of  discounting  piim- 
•spies,  113-124;  imfdicit  rate  of  int» 

3*'"       °SiS4-3SS:  guaraataaiw 

of.  by  stockholders,  4(6.  ^ 
Bond-value  books,  123. 
Book  credit,  influence  of,  on  velodty  of 
circulation,  i97-«99:  influence  of,  o* 
volume  of  depaH  mmmt^  aaff  oa 
prices.  202-203. 
Book  value  of  capital,  44-45. 
Borrowing  and  lending,  eauaUaadmi  el 
margiBd  Mn  of  iMtSMakT^ 
304.  ' 

""iowJ 

wwlth  of,  by  adding  to  tefriUvy,  46a. 


•old.  itafalt 
•aU  cdia  ad.  mv-aii, 


of  tndBaad 

of  aa 


cAtct  id,  OB  volunie 
oo  pikii,  igs. 
tk0  can- 
by. 


Cdfonia,  ilMlatiae  ia.  of  tbeoiy  tint  ft 
lidng  iacoiae-atrMni  laiM  aad  a  faU- 
iag  liiiiMii  iliMi  dipMMt  nte  of 
iaUtmft,  405- 
Cqpit^  daii^laa,  W;  beak  aad  mvket 
Mhm  oi,  44-4S:  aaiMait  and  dh- 
tiftadoa  0^  ia  AiMrica,  so;  poMan 
hdd  bjTi  ia  coaoQitt  of  lacwwici  aad 
ootn  60-641  iaooM  to  ba  cnttad 
ta>  aad  oatfa  dihtod  to,  64;  Uk 
bMMaa  laoaBM  aad.  iooad  ia  tko  fata 
of  iatanat,  lois;  vdaatioa  o^  bom 
▼aha  of  ka  iacnae,  le;  -xoB;  rada- 
tfaaa  at  Inrnaii  ia  reiatiaa  to,  irf  ff.; 
acHialilim  ol,  a  oaadMoa  tliat 
■fftcia  tnMie,  193,  193;  productivity 
thfmjr  aa  to  iatanat  aad,  365-369; 

!  of  aaaialiits  as  to 
jr  aad,  369-371 ; 
,4aoM.i  fowddcf  ionaa 

SM^^^^^^^  tf^^^^A  •    ^^^^^^^^^^     —  -  --  ^       a#  > 

«■  sHnaa  soaii  wiwffm,  ioih,  oivi- 
dMdi,  aad  pvoto,  413-437;  advan- 
(afB  to  ilaiialni  of  poiwMing,  455- 
4A4f7:  ''li«iBK"aad''daMl."46i. 
wwwyiy  39ff-;  001 
lavoMiMaby,  st^St" 
■■Bawti^  tae  aatkada  oi 
mr  MMHaa  aai  hr 

^avwMj^m    daiaitha,  tf;  con- 

44:  af  a  decnartiw,  45-4S;  amount 
r  tn  mahi  a  hiatw  lafi.  iH 


cdbd.  4lt.  434- 
CaidtiliiliU  iaoaoM,  m^-mS;  appiica- 
tkaofi 
il*-I*4. 


Caiatal-value,  definition,  tt ;  <terivatioa 
it,  fnm  iacooBa-vaiua^  107-108;  ida- 
tkoB  batwMa  iatoraat  accrued,  ia- 
teceat  takm  oat,  aad,  116,  xax,  lay- 
133;  cxarfarfoaa  to  be  awldad  ia  con- 
cept* of  interest  accrued,  interett  taken 
out,  and,  132-136;  tUk  dement  in 
determlBing,  138-140. 

C^dtal  wealth.  5te  CaiAal  goods. 

Ci^itains  ol  industry,  439-460. 

Cash,  insuffidencjr  of .  to  be  distinguished 
from  inaoiveacj,  49;  beak's  asseu  in, 
may  be  lesa  thaa  deposits,  173; 
risk  of  iasoOdsocir  0^  Oe  gfsatsr.  the 
kaa  the  ratio  of  the  cask  to  the  de- 
mand Babflities,  175;  illustration  of 
insufficiency  of,  175-176;  mainte- 
nance and  regulation  of  a  laaarve,  176- 
178;  adjustment  of,  to  beiAdepodts, 
x8o-i8s. 

Cashaaaeta,dafiidtk»,«t. 

Cash  drawsr,  ddiiting  and  creditiac  tke, 
ia  iacaaae  aooeonting,  69-73. 

Cash  payments,  iaiasace  of  system  tt, 
ea  vdodty  of  drctdation,  197-198. 

Cattlicatea  of  ownership,  definitim.  SI. 

Chance,  eksseat  of ,  in  capftal  accounting, 
138-140.  Sm  Kisk. 

Charging,  inilMBace  of  habit  0^  ea  vo- 
lodty  of  cfccdation,  197-199:  iaflo- 
eace  of  kefait  of,  oa  vohaae  of  deposit 
uuMtLf  aad  oa  piioest  ao^^a^ 

Checks.  Sm  Bank  checks. 

CUna,  ssaaD  per  o^tta  wealth  of,  470. 

Cbodadag  credit,  defiaitkn,  IM;  es- 
pianathw  of,  165-171 ;  the  basis  of, 
ia  the  concrete,  tangible  wealth  of  the 

WOCld,  I7I-I74< 

Orcniating  media,  definition,  14>;  ( 

ikation  and  amoaat  of,  ia  theV 

States,  150-151. 
OrcuhUioB  of  aseaay,  significance  of, 

151 ;  method  of  obtaining  velocity  of, 

153-153- 

Qty  and  country  cualiaateil  «.« to  valee 

ity  of  dfcalation,  sox. 
Classificatkm  of  weehh,  9-11. 
Cleaiing  the  market,  meaidng  of  (rfvaaa^ 
273;  of  loans,  by  aulpmatic  adjust- 
ment of  rate  of  intsMst,  398-400; 
application  of  principle  of,  as  applied 
to  labor,  443-444- 
Coinage  ratio,  meaning  of,  334  a. 

8. 


,  trade,  effect  of,  on  price*, 
of  stocks  and  bonds  by, 
'  to  raise  prices,  aoj ;  may  result 
fram  cutthroat  competition,  33a ;  chief 
came*  of,  331-331;  restrictive  meas- 
ures  shouM  be  directed  toward  control, 
not  to  restoration  of  comprtition,  33a. 
Coomerdal  paper,  rate  of  tatanit  on, 
403. 

Commodities,  definition,  t. 

Competition,  a  condition  of  perfect, 
afo-36x;  "cutthroat,"  331;  result  of 
"cutthroat,"  may  be  mmopoly  or  com- 
bination, 333;  monc^Mly  defined  as 
•baence  of,  339;  potential  competi- 
tion. 330;  may  be  an  evil,  as  wlwn  of 
the  cutthroat  kind,  331;  between 
apkqrer  and  employee,  456-457. 

Complementary  articles,  attributes  and 
price  movementa  of,  347-348. 

Compound  interest,  lesulu  ttHtaMt 
by  computing,  485-486. 

Conservation  of  health,  446-44!^  49I. 

Conservation  of  land,  468. 

Contracts,  retardi^  of  a^wlnnt  of 
prices  by.  348. 

Copyrii^  a  necessity,  to  avoid  cut- 
throat competition,  331. 

Costs,  find,  definition,  SSS;  running, 

3SO.  *  «t 

Costs  of  wealth,  definition,  St-SS; 
measurement  of,  36 ;  are  the  itenu  con- 
stituting outgo,  the  negative  of  in- 
come,  63;  do  not  consist  of  money 
but  may  be  measured  in  money,  63; 
ultimate  item  of  cost  is  labor  cost  or 
efforts,  08-99. 

Couplet,  method  of :  in  comlHning  capital 
•«o«nts,  5>-54;  ultimate  result  of,  a 
list  of  articles  of  actual  wealth  owMd. 
54-56;  use  of,  to  solve  problem  of 
double  taxation,  58;  applied  to 
income  accounting,  75-76;  mMtmm 
of  ,  in  exhibiting  amount  of  ineame  con- 
tributed from  each  caitet  wamt*  89- 
00;  analogy  of,  in  innme  accounting, 
with  use  in  capital  accounting,  go-93. 

Credit,  mistake  of  regarcBng.  as  adding  to 
w^th  of  community,  sT.  defiaMon, 
IM;  bads  of,  found  in  the 
wealth  of  the  worid.  171-174. 

Credit  cycle,  diaajatias  cf  eaa 


184-191;  tina  §m 

usually  ab  

Ciediilag  and  < 

7a. 

Crises,  description  of,  xl 
tnramplei  to  IBaaimik 
adjuftmeat  «f  rata  of  i 
avert,  363. 
Currency,  definition.  US;  two  daM 
of.  monqr  and  baak  depaili^  14! 
two  typea  of  nrtmnte  ntU 
tute  the  drculation  of,  x)«  f . 
Curves,  discount.  108-xis;  of 
and  supply,  363  ff.;  of  iwHvidal 
demands,  379,  ate:  liatlrabillty.  391- 
294;  of  aaisiBidMaMkyafBMiMy 
399-3m:  of  Mqp^,  3i»-Si» 
Cutthroat  competitioa,  aaaMoaannife 
inc  in.  317-321 ;  the  mikm  Vti  S*S 
an  example  of  wmUtfiajfi^mm 
501-503. 
Cyde,  of  piioM^  ata-ta^  «f 


Darwin.~ChariH  R..  "nattori 

theory  of,  474-475- 
Death  rata,  iacnaaa  ai,  a 
rnpnimaii  bqwarf  • 
47x-47a. 
Debtlmitof  dties,3S. 
Degeneration,  danger  of, 

conditions  rdative  to 
Demand,  acbsdulaa  «<. 
lations  tuiwai  mi/tlf  aai, 
aented  by  cunra^  «««  i,j 
of,  368-377 ;  tha 

the  way  oil  

Khedules  to  shcnr  thatiha 
mand  at  aay  priiga  ia 
individual 

.>8i;  tka  iMBdallaaiti 
wants,  $m 

ftmmt  a 

term.  a6z-atfs. 
Demand  curve. 
Demand 
Density  of  _ 
vebdtiaa«f 

30I. 

Deposit  cunaqr,  t4t, 
Deposit-iytok  X70. 


Maftla 


id,  m 


DeprecUtion,    cmicept    of,  iJ4r-ijs; 

is  czoeM  of  income  taken  tttWHtbt- 

tcrest  accrued,  134,  136. 
Depcedation  hind,  definition,  91;  a 

dtvice    for    ttandardiring  income, 

J36-137. 

MnUbiUty,  definition,  Itt-SM;  total 
and  maiiinal,  383 ;  illiutiation  of  di^ 
tinctioo  between  total  and  marginal, 
383-285;  an  increase  in  the  quantity 
of  goods  under  consideration  results  in 
a  decrease  in  tlie  marginal  desirability, 
s86;  rriation  of  marliet  price  to,  294 
ff. ;  surplus  desirability,  295-297 ;  effect 
of  concept  of,  on  our  views  of  both 
fordgn  and  domestic  trade,  397-298; 
prime  necessity  of  corrsctiag  money 
comparisons  when  comparii^  desira- 
bilities, 298- joo ;  difSculty  of  measur- 
ing this  real  concept,  301 ;  why 


urement   in   tenna  of 
unsatisfactory,  3m.  Sm 
nal  desirability. 
Doires,  the  foundation  of 
coveted  to  lie  in,  300-302. 
Diamonds,  vanity  and  socially 

livaby  illustrated  by 
Biet,  impaired  vitality 

haUts  (rf,  446-447. 
Discount  airve,  thie,  108-112. 
Discounting  income,  definition,  IM. 
Bistribtttion  of  income  in  time,  defim- 
tion,  tT9 ;  influence  of,  on  impatience 
and  the  rate  of  interest,  379-  )8i ; 
distribution  relativdy  to  the  agsBts 
•r  instrummts  of  production,  419-463 ; 
rdativdy  to  those  who  own  aitd  «ik^ 
it,  464-493. 
Distribution  of  wealth,  the  problem  of, 
465 ;  among  nations,  467-476 ;  among 
individuals,  476-  483 ;    if  equality  of, 
could  be  estaUished.  it  would  prove 
an  anstable  condition,  478-483 ;  iniu- 
ence  on,  of  rate  of  impatienoe,  ability, 
industry,  luck,  and  fraud,  479-482; 
graphic   rrpresentation   of,  by  heU- 
shaped  figure,  490-491 ;  in§uen<«  of 
inheritance  of  pN(Mrty  on,  40(  493. 
Dividends,  income  ktm  ayiul  faoB 
of,  424 ;  elemait*  «f 
bility  in,  424-425. 
Division   of   labor,   d«M(ioa.  IM; 

io  pffrWimiii't 

Iv. 


geographical,  450;  disadvantagn  ol. 
and  ingytred  remedy,  450-451. 
Double  tantioo,  due  to  coafuaiaa  be- 
tween wcaMi  and  pnqwrty,  34;  solu- 
tioB  oi  pmUhb  vt,  by  nH  oi  1 


Economics,  definition,  1 ;  total  diffetenca 
between  business  and,  2;  at  bottom 
treats  simply  of  eCorts  and  satisfac- 
tions, 98-100 ;  a  branch  of  the  subject 
of  sociology,  514. 

Eklucation,  reason  of  importance  of  a 
general,  for  the  workingman,  45) 

Efficiency  of  labor,  444  ff. ;  the  greater 
that  of  workingmen,  the  greater  the 
amount  of  income  they  recsh>iL, 
444-446 ;  methods  of  increaang :  ^ 
improvement  in  physical  and  mental 
vitality,  in  trade  education,  and  in 
organization  and  division  of  labor, 
446-449. 

Efforts,  or  labor  coats,  are  the  ultimaM 
item  of  coat,  77.  9»-99.  I4»,  306-307 ; 
in  final  mwlysis,  prices  are  dependent 
<»  satisfactions  and,  351-353. 

Empiivccs,  ai«  workMn  whoee  wages 
oome  in  form  of  profits,  ^455; 
Miation  of,  to  MBpiogrMi  a 


457-45«- 

Ei^oyaU*  iwxBe,  Uie        of,  97-«B. 
Baterprfseis,    dsfeiition,    107,  4V; 
poMtion  of  and  parts  taken  by  daing 

transition  periods,  187,  advan- 
tages to,  of  possessing  capital,  455- 
456,  457 :  sdect  class  formed  by,  and 
Masons,  457;  relation  bctwetu  wage- 
earners  and  generally  a  coapiemen- 
tarv  457-458. 
Enterprisers'  profits,  433,  434;  wages 

"nd.  454-  458. 
f>)aaKty  of  dUtribution  of  wealth,  course 

<A  events  in  case  of,  478-483. 
^mAm  of  MchMge,  definition,  IM; 

arithmetically,  1 5»-i  56 ; 
mechanicaUy,  156-150;  «x- 
prcsaed  algeteaiealir,  159-160:  cflael 
of  ittdttding  has*  deposits  or  drcn- 
lating  cndtt  in  tke,  i79-r8»;  periodi 


590 


XNOBX 


twd  d  ftiBgii  fa  pdem  or  qfmmtitin, 

T'T*  *^         on  PopulaUon 
•ndvdodtjraldraAufaii.  aoi. 

Euxema.  WMMted  nma4y  for  degen 
eraUoB  ■oKmg  popubtioo.  476. 

ExchMiB  ol  WMhh.  defiiiidon.  14; 

g«fa«d  M  fat<t«ctioiu  which  change 
y^^"***^^  •••Ith,  81 ;  consists 
«  t—  tWHihi^  St;  three  groups  of 
hwrter,  exchange  of  money 
"tmtf,  aad  purchase  and  sale 
^t  j  aqntfaa  oi;  iji-ibo;  u  po»! 
Ate  tjrp«  d;  !»«.  S«Bq«taiof 
exchange. 

E«k«»«etbi»jr,  dm  of.  of  good. 

■•fc«fae,xj8. 

"^y*fa«  of  Hfe,  effectof,  on  impa- 

nnce  a^  tkaniace  on  rate  of  interest. 
375.  377' 

^xpmm,  ixed  and  nmning,  3a*-%2A 
E<pUdt  lata  of  iaM^aJ^UL 

Expiidt  w^i%  dafaMoo,  4M. 
^«Pyatfa» aadbtportatkn  of  money, 
opnatfag  through  the, 
■  VMBtitjr  «f  BMioey,  304- 


F'rtitioua  pemn,  delhitioa,  40;  dis- 
™>ction  between  accounting  <rf  a  real 
P«on  and  of  a.  50-51;  method  of 
»*oi^  facone  of,  71-72;  daobk 
entry  in  aeeowu  of,  02-95. 
Kdudary  moBcty,  definition,  149. 
Final  or  ei^oyabte  income,  definition. 

Sm  ucome. 
'tai*         323-314 ;  have  no  efiFect  on 
wpidy  after  they  have  been  once  in- 
curred.  3»4r3»6;  therefore  have  no 
L"*  Ptj^^  3*6;  how  general 
ht  fnm,  in  effect  on  supnly 

•ood^  drfaitiao,  37;  income 
_  rmMiiaef  a,3S. 

sympathy  in  move- 
346. 

t  influence  of  vanity 


iiluatratad 

SOS. 

Foreign  trade,  influence  of,  oa 
of  money  and  on  prion, 
misconception  as  to  "favot^ia''nd 
"  unfavorable  "  balance  of,  297. 
Foresight,  inadequacy  of,  as  ihuna  fa 
only  partial  adjustment  of  mla  2 
interest  to  price  level,  jftt^ 
mfluence  of.  on  rate  of  ^Un^lZ^ 
363.375-376;  countries  cWto£> 
conditions  when  "  ^^""^ 
PoewMion  of,  fey 

^  "t^  455.  4*7 
France,  | 
469. 

Franldin,  Bauaatfa,  tiiniimi  b 

trate  •  •     ■ "  ^' 

486. 

Fraud,  may  play  a  part  fa  1 

of  wealth,  481-482. 
Freedom  of  trade,  rektion  between,  and 
volume  of  trade  and  thndonTBiceiL 

by.  336-337. 
Frequency  of  recdpta  and  disburse- 
ments, influence  <rf,  on  ■.•akidttea  of 
circulation  and  on  prices,  tgMoo. 
Fuel  substitutes,  relation  between  mgt^ 

menu  of  prices  of,  345-346. 
Futures,  speculators'  dealings  in,  330-tai. 
Futurity,  idea  of,  implied  in  definiteof 
property,  27-28;  dement  of.  fa 
Hdering  desirabilities  and 
bilitiea.  310-311,  jaS-jag. 


Galton,  Sir  Frauds,  remedy  for  rtriinau 
tion  of  population  devised  by,  476. 

Gamblers,  extreme  of  incaution  lepie- 
sented  by,  426-427. 

General  costs,  definition,  M7;  differ- 
ence between  fixed  cosU  and,  328. 

Geographical  diffenaces  fa  aatioal  ». 
sources,  a  rmidltfaii  iMteOag  *'yitt. 
i9»,  103. 

Geographical  division  of  labor,  4501 
Gold,  reason  for  use  of,  as  money,  147; 
gold  coin  the  only  primary  money  fa 
the  United  SUtes,  151 ;  affect  of  r 
extraordiaary  production  of,  on 
tevda,  ass-  praapacts  for  tka 


u  to,  *SS-*56;  espioiUtlon  oi  mine* 
when  their  product  depcedate*  the 
currency  ui  ezampU:  <rf  we>hh  in- 
jurious to  sodety,  499-500. 

Goods,  the  collective  term  for  wealth, 
benefits,  and  property,  30;  capital  a 
stock  of,  income  a  flow  of,  37-38. 

Goods  complementary  on  the  demand 
side,  definition,  S47;  complementary 
on  the  supply  side,  definition,  S4f . 

Goods  in  series,  definition,  SW. 

GovemmcBt  bmia,  tte  wnVk  btUnd. 
31. 

Greenbacks,  illustration  from  iseiie  of, 
to  show  how  rise  of  prices  helps  bor- 
rowers, 360. 
Greaham's  Law,  that  cheaper  money 
tenda  to  drive  out  dearer,  Sll-tSS; 
conditions  under  which  it  will  not 
result  in  complete  ez|MiUw  of  the 
dearer  metal,  330-132. 
Groi*  income,  definition,  M. 
Ground  rent,  definition,  41S ;  found  to  be 
the  difference  between  the  productiv- 
ity of  the  land  and  the  productivity 
of  land  on  the  margin  of  cohivatiaD, 
418  i  difference  between,  and  rent  of 
other  instruments,  41*;  effect  on 
taxation  of  difference  betmoB  snNind 
4M>> 


:  «|^  m  vdodty  of  drcula- 
tkm  and  on  dcpodts,  196-199;  rela- 
tion between  rate  of  iatoMt  and.  375> 
376-377;  effect  of  laboma',  on  dfi- 
denqr.  446-447- 
Health,  conaervatioB  of  laborers'  and 
•feet  OB  offdency,  446-448;  forms  of 
waalth  iKjatiovato  the,  498- 
Hodglnib  M^ioB,  4a»-Ul. 
HoavttBK  faffiumf  of,  on  vdodty  of 

dfciilalloB,  Z9^i97« 
HoBaad,  laiga  per  oMpita  wealth  of,  470. 
HoMB  hihip.  exdusion  of,  from  defi- 
■MoBof  WMlth,  3>  9-10;  difficulty  of 

436-44^  J 


sppeiAn  cf  vaidty  by,  jar- 


ImpatieBce.  the  Mam  of  iaiaiwt,  371' 
37a;  impatioBoeforfooda,oBaBa|niab 
retoKos  hialf  into  preforoBco  for  pmnt 
enjoyable  income  over  httm  mitf 
able  incooe,  37»-374;  diflWBcw  la. 
due  to  hniMB  natvn,  tenilt  b  differ- 
eaoea  ia  nto  of  laterMt,  379-37*  • 
diflereaon  in,  dne  to  dHimon  is 
incoBM  ■■  to  ifiitilbatiaB  ia  tioH^ 
amount,  and  uncertaiatiei,  378-38S; 
equaUaatioa  of  marginal  rates  of.  by 
borrowing  aad  lending.  389-304 ;  equal- 
iaation  by  tpmding  aad  iavwdag^ 
394-396;  cffecu  of  rate  of.  mcb  ia 
inequaHtiet  in  ditiibutiaa  of  wealth, 
0-481. 

Iii^pecuniodty  and  vdodty  of  dmilatioH, 
197,  199- 

Implidt  rate  of  interest,  definitioa,  IM. 
ImpUdt  rent,  definitioo,  41B. 
Implidt  wages,  definition,  4<S. 
Imported  artides  and  vanity,  9B4-SOS- 
Inadequacy  of  fondi^  lack  of  adivit- 

ment  uf  nil  of  iBttMt  Aw  la^  ^tti- 

36s. 

Income.  delBMoa,  N;  tm  ooacipt  oC; « 
the  flow  of  whatever  beaiAta  meam 
bom  any  artide,  6e-6i;  toMy  bo 
tnaslstad  into  tenia  of  BMnqr  aad  li 
Mdiject  to  aoooontittg;  6s;  groea  Ibp 
come,  63;  net  Inoome,  64 ;  method  of 
keepbg  income  accounts,  64r-<S; 
avoidance  of  irregularity  in,  by  creatioa 
of  depredaticm  fund  and  other  devices, 
67-69,  136-138;  no  net,  of  fictitious 
penoBSt  71-7* ;  omiMioBi  and  eirora 
ia  lockoning  a  penon'a  raal,  7S-74; 
the  ttage  of  fiaal  or  anioyaUe,  97-«B; 
OOBdltttOB  oottccnilBit  (ImA  tbc  Isflt 
aaalyaU  it  conditt  of  wHrfactiwi^ 
aad  outgo  of  efforts  to  ason  istio* 
factioBat  99:  estfanated  woctil  of  fiaal 
incoaw  aaaually  enjoyed  ia  Vallad 
Statn,  99;  link  between  capital  sad, 
in  rate  of  btereat,  103 ;  value  of,  iissd 
to  derive  value  of  coital  yiaWag  it, 
107-X08;  vaiiatioas  of,  ia  nMoB  to 
capitd,  117  ff.;  dMniacas  ia  tm^tf 
tienoe  sad  la  rsto  at  iMsnat  das  to 
differences  in,  aa  to  dhtifliutiea  ia 
time,  amooat,  aad  martalBtka^  378- 
388;  daasifiad  lato 
433-434; 


5M 


^UlliU'  profiu.  iateiwt  and  diW. 
*"<'^434-43S;  rdwive  importuca 
""y*        1'""»'«tie»  in  compui- 
MM  Of,  4*9-466;  lOMsh  Mtiaute  of 

_  modificMic  i  of,  by  bor- 

lendiof,  and  spending 

to  dmnbtttkii  m  tioM  by  adiiut. 
mat  betweca  mm»m  mI  Imm 

inf.  305-396. 
Ind«  number  of  prices,  definition.  Mt. 
^*;;W*U  per  capiU  wealth  of,  470. 
IMvMul  doaands.  are  derived  from 

maniBd  desirabilities,  287  B. 
Individual  demand  scbeduks,  formatiaa 

of,  faom  desliBWlitjr  idieduleib  878; 

Individuals,  wealth  or  pmmla  ol  in  a 

^oi^t  ability  and,  a  potMt  Mnm  of 

•CQ^tof  wealth,  481. 
•"•JJjlWea  in  distribution  of  wealth 

yoifaidividuals,  476-483;  tendency 

^nfLSf^"?** 
*™ntance  laws  on,  491. 

Mwon  of  cnnency,  relaUons  between 

Mwy  and  rate  of  interest  during. 

_  85-358, 3S9-36J.  ^' 

MMitants,  importance  of  factor  of,  in 


wMhli  an 


iv  method  TaLhi  |L  SLS; 

uncanceled  otf^m  cl  biaZ 

and  coats,  94^ 
Interest,  avoidaaet  of  eoafMrn  of  rata 
!L^."*  cost  to 

,*?fJ"PP=*t.  354-3SS;  iwductivity 
tj««y  of,  36ihj69.  MdaBst  ^ 

5  the  futility 


At  Population. 

Wjjrftance  of  property,  effect  of,  on 
WOibutiao  of  wealth  among  indi- 
^duals.  49r;  problems  cwmected 
with,  401-493;  suggested  reguktions 

,_fy"»ing.  493. 

«W»wqr,  definiUon,  48;  distinction 
bacwm  insufficiency  <a  cash  and,  49- 
i^te  of,  in  banking,  175;  conditions 
""^^to,  in  crises.  187-189. 

Se*  Article  of  malth. 

«,«. 

luonaoe,  as  a  na«M  «|  Maidmi  ^ 

risk,  4aS-4so. 
I"«««»CtkM,  definition,  78;  prevalence 
?»"  "^f?".«d  outgo  «ccount8.  77 ; 
ttw  chief  kinds  of,  between  two 
«««8  or  groups  of  articles,  77-78; 
tmu  change  the  form  of  wealth  are 
«■«    pwduction,    78-70;  which 


nnt  to  oe  nnnsmerul  aa,  4s>-4aA 
434:  Pndiiloaa  flgom  obteiMbk 
««±onin,  compound.  4li.  Sm  Mm 

Intaest   accrued,   idationa  between 
mterest  taken  out  and,  and  canital 
value,  X16,  Hx.  „^.X34. 
Invrativeness,  a  ctafaf  g«Hty  in  datar- 
mining  a  nation's  aocon  " 
ucts,  469. 
Investing;  definition.  Ml: 
between  spending  op 
distributi(Hi  in  time  of  oaa'a 
stream,  395-396. 
Investment,  question  of  ifak  attsrbnd 
to  every.  435;  Umitatiou  to  ormt- 
tunity  for,  484^^486. 
Irredeonable  paper  monqr,  may  dtn- 
late  but  haa  it.  daiiisn; 


Klondike,  pheaoneaa  of  muHniii 
interest  rates  ^^—pHUwi  in  the.  io< 

Knowledge  of  futuiTfaBStBrfr^ 
method  of  reducing  risk,  4Sf^-4a8. ' 

Knowledge  of  technique  of  ndaelioa. 
a  cwKlitioa  aflecti^  tM*k  f^/HaT' 


5*S 


Libor,  ths  ultimaU  uncancelwl  item  ol 
OMt,  77,  g8-9<*,  14».  306-307;  ten- 
dency of  prices  ol,  to  cqualiution, 
thoush  lew  npidly  than  other  com- 
modities, 335,  34^349;  differences  in 
cost  of,  due  to  esisUnce  of  noncom- 
petinc  groups,  349;  sodslitt  theory 
of  li^t  of,  to  sli  interest,  369-371; 
wages  constitute  the  income  from,  433 ; 
pecuUaiities  of  supply  of,  436  ff. ;  con- 
ditions governing  demand  for,  440  ff . ; 
the  "make-work"  fallacy,  431-454- 

Laborers,  comparison  of  wages  of 
English  and  American,  300;  increase 
in  wages  of,  makes  for  shorter  hours, 
313-314.  436-438;  classes  of,  accord- 
ing to  productive  power,  435-436; 
wages  of,  not  being  reckoned  net, 
cannot  be  compared  with  interest 
received  by  a  bondholder,  439 ;  effect 
ol  rate  of  interest  on,  442-443;  the 
greater  the  efficiency  of,  the  greater  the 
amount  of  real  income  received  by, 
444-446;  methods  of  increasing 
efficiency  of:  by  improvement  in 
mental  and  physical  vitality,  by 
Improvement  in  trade  education,  and 
by  improvement  in  organisatioa  and 
division  of  labor,  446-449; 
effects  on,  of  UaMmtag  aadlBery, 
461-463. 

LalMr-saving  machinery,  falladou  rea- 
soning shown  by  prejudice  against, 
453 ;  real  economic  effect  of,  461-462 

Land,  definition,  • ;  rent  of,  413  ff- ;  Pecul' 
iarities  of,  in  being  practically  fixed 
in  quantity  and  not  open  to  clasdfica- 
tion  as  to  qualities,  413-414;  Ricar- 
dan  doctrine  of  land  rent,  «t  the 
"marginal  acre,"  413-418;  Terence 
between  rent  of,  and  rent  of  other 
instruments,  433;  the  factM  of,  in 
national  wealth,  468-469;  not 
constant  source  of  inoooie,  as  shown 
by  recent  conservation  movement, 
468;    on  ratio  between  population 


and,  depend  the  increase  of  national 
wealth  and  the  increase  or  ~ 
per  capiU  wealth,  470-47a. 
Lud  improvements,  definition,  9. 
Land  tent,  is  intemt  aa  much  u  oUwc 
I  flf  nat,  4«*-4«3-  SmMmfL 


Law  of  decnaring  OMt,  the.  317  n. 
Law  of  diminiiWng  rstums,  tlit,  311  m.\ 

appUcd  to  agriculture,  430-411, 47a. 
Law  of  incwaiing  coat,  the,  311 ;  ailM 

to  agiicultun,  4S»-4ii,  4T>> 
Law  of  incwaiing  ntHm,  tim,  >• 
Legal  tmdw.  daMtka.  Mff. 
Levd  of 

Fries  levd. 
LiabUitiea,  definiUoa,  «•;  ifawri  k 
rdation  between  aaeta  m4  ia  MCNBt- 
ii«  of  real  and  of  fidiiioai  panons, 
50-51;  in  balance  ihaaU  of  banks, 
iS6ff. 

Life  insurance  lowering  of  nia  of 
impatience  and  10  of  rata  of  intanat 
by,  377-378;  a  method  of  reducing 
uncertainty,  438-439. 
"Limping"  standard,  definition,  IM; 
unsatisfactory  residta  of,  w  ilMm  to 
monetary  system  of  Uakid  SlalHt 
338-339- 

Loans,  in  banking  are  an  Mdnuita  of 
money  or  credit  for  a  promisaory 
note,  168;  UmiU  to,  impoaad  bjr  pra- 
dence  and  aownd  economic  poBcy,  ir«- 
176;  method  of  regulating.  176-117; 
part  piayad  by,  in  a  period  ol  tnMl> 
tion.  185-191 ;  iniiMDCi  of,  oa  vrfMi> 
tics  of  diailatian  of  MMT  "A  «< 
dqwaits,  198;  as  a  BMHWof  oqMtatot 
marginal  rates  of  iMjlitwn»  jl*- 
394;  may  be  properiy  lioHod  wnh^ 
sna-mr  t  nrakiUtiaa  of  bn  caalaMli 
does  not  pnkwR  taMMMt  MnrMfl 
rMiiiferfwtooif 

■ecoli  to 

faL 

Love  for  pooterltjr,  dbct  0^ 
of  interest,  375.  STT-Jf*; 
wanting  to,  aaPMBg  lAoai  Mik  I 
rataa  aio  ooi  ... 
Lowell  Institute  beqoaot,  4M> 
Luck,  part  piajred  by,  to 
of  fortanaa,  48x-4*o- 


"Make-woik 
Malthua, 
Marian,  baytaf  on,  ttlk 
"Marginal 


of  «hib4i*' 


MICROCOPY  KISOIUnON  TBT  CNART 

(ANSI  and  ISO  TEST  CHART  No.  J) 


524 


INSBX 


Miriinal  oMt,  at  aadMfaiUfty,  305, 
3Q6tao7  8.;  fa  the  9Mt  dauimiiiaiit 
of  xaaAtt  prioa  ca  tbe  ride  of  Mvptjr, 
309;  vfamd  M  tlw  doire  to  Bvoid 
■OBMitliing  dtaigntabb,  u  oppond 
to  muifaMl  deibafaiHty,  the  derire  to 
Mcon  eamthfaig  agceedile,  310;  the 
•hneat  of  fatuity  which  controls, 
5x0-311. 

Matlinal  darfnUBty,  debdtioii.  S8S; 
flhatretioo  of  concept,  iSy-aSsi  u 
facfeaieta  the  qiwntity  of  good*  under 
coiwldenitfan  iceulu  in  a  decnaae  in, 
sS6;  maqjnal  derinUKtr  of  money, 
sSr;  infividual  demands  are  derived 
bom  maiilnal  deriraUHtiei,  387-294; 
inqmrtaaoe  of,  of  mon^,  agS-300; 
coHidentioBof,with  maribal  coet,as 
honwn  deiiree  trwiilated  into  money, 
310:  the  ekoMBt  of  fittarity  which 
oootraii,  310-31X;  decreaee  of  mar- 
ginel  deifasbiUtyof  money.in  propor- 
tioft  to  iBcreaae  of  aaninci,  311-314; 
of  commodttiee  and  of  rabetitutes 
for  commodities  tend  to  fsll  or  rise  in 
viiaon,  34S-346;  tendency  of,  of 
nbetitutcs  to  lUy  equal,  345-346. 

Marginal  rates  of  impatience,  equaliza- 
tion of,  by  bwrowing  and  lending, 
389-394;  by  spending  and  investing, 
394-396. 

Marginal  uidt  of  woric,  441. 

Market,  definitioa,  tW. 

Market  price,  (iefinition,  MS;  connec- 
tion between  dwnend  or  supply  and, 
a68  ff.;  relation  0^  to  desirability, 
S04  fa  equal  to  the  ratio  between 
the  marginal  desirability  <A  any  good 
and  the  marginal  desirability  of 
money  for  each  and  every  buyer,  395 ; 
the  determinant  of,  on  the  side  of 
supply  b  marginal  cost,  309. 

Market  vahw  w.  book  viltM  of  opital, 
44-4$. 

Mars.  Kari,  wealotw  in  Omory  of 

fattcmt  of,  370. 
Measnrement  of  wealth,  11  flf. ;  necessity 

of  homogeneity  of  wealth  for  purposes 

of,  la;  Unlit  of  accuracy  in,  ao-71; 

measurement  of  benefits  of  wealth, 

a4r-2s:   of  costs  of  wealth,  26. 
Melting  and  minting,  influence  of,  on 

quMMity  of  money  aad  tfamfon  on 

prioM,  aoo-aii. 


MeicaiitiHan,  fallacy  in  theory  of,  8. 

Method  of  balances,  definition,  Sl-BS. 
St  Balances. 

Method  of  couples,  definition,  8S. 
See  Couples. 

Monetary  systems,  character  of,  affects 
volume  of  trade  and  prices,  195; 
influence  of,  on  volume  of  deposit 
currency  and  on  prices,  203;  opera- 
tion of,  221  ff.;  Gresham's  Law,  221- 
ass;  bimetallism,  323-224;  conditions 
whoi  bimetallism  fails,  326-230;  when 
bimetallism  succeeds,  330-332;  the 
"limping"  sUndard,  235-238;  unsatis- 
factory and  complicated  features  of 
mcHietary  system  of  United  States, 
238-339. 

Money,    necesaty    of  distinguishing 
between  wealth  and,  5  ff. ;  economic 
fallacies  concerning,  6-8;  use  of  the 
catch  phrase  "making  money,"  9; 
definition,  15,  147;  convenience  as  a 
measure  of  value,  18-19;  concept  of 
income  not  of  necessity  to  be  con- 
nected with,  60-61 ;  all  income  may 
be  translated  into  terms  of,  63;  risk 
of  confusion  owing  to,  in  estimating 
real  income,  73-74;  degrees  of  ex- 
changeability of  commodities  before 
reaching,  147-148;  checks  drawn  on 
bank  deposits  are  not,  but  bank 
notes  are,  148-149;    two  kinds  of 
real,  primary  and  fiduciary,  149; 
meaning  of  circulation  of  money,  151 ; 
quantity  theory  of,  rests  on  fact  that 
it  has  no  definite  relation  to  the  satis- 
faction of  human  wants,  but  only  the 
power  to  purchase  things  having  such 
satisfying  power,  164;    division  of, 
in  two  chief  parts:  money  in  circula- 
tion and  money  in  banks,  178;  def- 
inite ratio  of  bank  deposits  to,  180- 
182;   disturbing  effect  of  transition 
periods  on  ratio  between  bank  deposits 
and,  184-185;  effect  of  character  of 
monetary  systems  on  volume  of  trade 
and  price  level,  195;    influence  of 
balance  of  trade  on  quantity  of,  and 
therefore  on  prices,  204-309 ;  influence 
of  melting  and  minting  on  quantity 
of,  and  on  prices,  309-211;  influence 
of  production  and  consumption  of 
money  metals  on,  and  on  prices,  211- 
214;  illuttrationbymeansof  reiervoin 


Danx 


of  infloences  affecting  the  quantity  of, 
ai5-3ig;  influence  of  moaetaiy, 
qritems  in  increasing  quantity  of, 
■nd  rainng  prices,  aai  ff. ;  conclusions 
■ad  snnunings-up  on,  340-357;  the 
nwrgt"*'  desirab^ty  of,)387;  impor- 
tance of  the  maipnal  desirability  of, 
398-300;  measurement  <rf  desirability 
in  terms  <A,  is  measuring  cause  by  its 
effect,  301;  interest  and,  354  B-i 
fallacy  ol  thewy  that  rate  of  interest 
is  affected  by  quantity  of,  35^359- 

Money  changing,  151  • 

Money  in  circulation,  definition,  181. 

Money  metals,  influence  <A  i»oduction 
and  consumption  of,  on  quantity  of 
money  and  on  prices,  311-314. 

Monopoly,  effect  of,  on  volume  of 
trade  and  prices,  195;  tendency 
tonrard,  as  a  result  til  cutthroat 
ccunpetition,  331-333;  fixing  of  price 
under,  339-330;  evils  and  advantages 
of,  330-331;  restrictive  measures 
iboald  be  dinctcd  towaid  control 

N 

Mrifeu,  wealth  of,  467-469;  dependence 
at  wealth  of,  on  numbw  ol  inhabi- 
tants, extent  of  territory,  and  amount 
of  accumulated  products,  468. 

Net  appcedatian,  134- 

Net  capital,  definition,  40. 

Net  income,  definition,  M;  devices  for 
making  regular,  67-^;  method  of 
daiiving  a  person's,  70-71;  ietftfous 
penoBS  have  no,  7i-7<- 

Nuisancci which  an  enmplMfll  wcklly 
tajoiiaBa  wwhh,  joo. 

Naite.  MMMMt  of  WMitk  by.  13. 

O 

Organisati<m  of  lahar,  improvement  in 
workingmen's  cffidoMy  by>  44»-45o- 

Onament,  aitidea  of,  ft  gnllimfcft  of 
vanity,  503-306. 

Outgo,  definition,  ft. 

Overhead  costs,  definitioB,  SIT. 

Overpopulation,  results  of,  47i- 

OwBHiUp  of  wealth,  33,  37;  subdivi- 
rfoM  «f,  39-30;  confusion  regarding 
■MR  omMeum  «(.  to  ba  ftvafakd. 


31-33;  practical  problems  concern- 
ing, M-36;  figuita  0^  in  Amoica, 

P 

Pace-making  among  laborers,  448. 
Pareto,  Professor,  dted  on  inequality 

in  dbtribution  of  wealth,  478, 490-491. 
Particular  running  costs,  definition,  ttT. 
Patents,   necessity  of,  as  protecticm 

against  cutthroat  C(»npetition,  331. 
Payments,  influence  of  systems  of,  on 

velocities  of  circulation  and  on  prices, 

199-301. 

Per  capita  wealth  of  a  nation,  469ff;; 

increase  of  population  up  to  a  certun 

ratio  increases  the,  after  that  point 

decreases,  470-474. 
Political  corruption,  an  evil  attendant 

on  uaavnl  Jhtitorton  of  wHK 

407. 

Populanon,  influence  of  density  of,  on 
velocities  of  circulation  and  on  prices, 
30i;  slowness  in  readjustments  of, 
431 ;  the  factor  of,  in  na^onal  wealth. 
467-468;  relation  of,  to  extent  ai 
natiiHtal  territory,  469;  differing 
views  concerning  increase  of,  in  autoc- 
racies and  democracies,  470;  how 
the  increase  of  national  wealth  depends 
on  ratio  between  land  and.  470-473; 
increase  of  death  rate  when  ratio  of, 
to  land  becomes  excessive,  473 ;  laws 
of,  in  relation  to  wealth,  473-474; 
limit  set  by  nature  on,  corresponds 
to  that  set  on  plant  and  animal  Hfe, 
474-475;  the  preventive  check  on, 
among  the  wealthier  classes,  475-476: 
"race  suidde,"  476;  danger  of  de- 
generation, and  its  remedy,  476. 

Post  office  orders,  nature  of,  as  currency, 
165-166. 

Poverty,  influence  of,  on  impatience  and 
the  rate  of  interest,  381-383 ;  discus- 
don  of  problems  of  wealth  and,  464  fl. ; 
of  nations,  467-469;  of  individuals^ 
469  ff.;  influence  of,  on  birth  rate, 
471-47*.  473-474;  passing  down  ol, 
from  generation  to  generation,  483; 
the  lowest  limit  of,  483-484;  dangMl 
and  evils  connected  with,  40S-497- 
Pievcndve  check  on  population,  475- 
PliGa  cyck  dwcriptiaa  of  a.  i<*-i0t> 


5^6 


mm 


Plto  fevd.  a  reciprocal  of  tfw  pfarue 
the  puicliHiiif  pomr  «f  nooey," 
146;  depewkaoe  ct,  on  qautity  of 
mooqr  in  dicniatiaa,  vdodty  of 
dRnbtiao.  aad  vohime  ct  trade,  151- 
iS<:  varies  dinctljp  at  the  quantity 
of  mooqr  In  dicidttioa,  direcUy  as 
the  vdodty  of  it*  dtcnhtion,  and 
invendy  at  the  volune  of  trade 
^onewith  it,  155,  159,  160;  increase 
of,  wtth  increase  ef  aoMgr  or  bank 
d^osit%  i7»-xla:  ttii4y  of  riw  of, 
•Bd  effects,  in  a  tnmitioB  period, 
186-187;  lowoiag  of,  after  oest  of 
wdlt  «7cle  is  passed,  189;  remote 
huhKBcas  that  affect,  snch  at  geo- 
graidiical   <Miwmces,   extent  uid 
variety  >;f  hamaa  wants,  etc.,  192  ff. , 
effect  ot  protective  tariffs  on,  x94-igs, 
»or-ao8;  bOmace  on,  of  faidividual 
Mhtt%systo«s  of  payments,  density 
of  popmation,  and  raiudity  ot  trans- 
porutioo,  xgfr-sois;  raising  effect  of 
improved   mooetary   and  banking 
^^ties,  sea;  trusty  by  issuing  a 
gnat  Baas  of  stocks  and  bonds,  tend 
toraise,soi3;  inflneaoeof  faiteniational 
^eoii,se4r-ao9:  faiinenceof  mehing 
and  aiBtiag  oa,  soq-sii;  influence 


prodmtloa  aad  consumption  of 


S11-S14;  use  of, 
ber  for  indicating 
Itnndof  diaages  in  prices.  a4g 
^^Uitoiy  of  price  levels,  ss3-»S7. 
•■set  of  faiciease  in  production  of 
IBM  OB,  riace  1896.  ass;  individusl 
pnosa  pcrwpiKise  a,  asS-asg,  ayS-a jj ; 
aecasrity  for  aOoiring  for  differences 
ta,  fai  comparing  marginal  desirabil- 
Mea  of  money,  300;  the  real  and  the 
idsd  •4instment  of  rate  of  interest 
to  the  rise  or  fall  of,  361-363. 
Price  of  ■easy,  two  -*-irrHio  of  nhnse 

Mob  of  wtMt,  definiti<m,  14;  asking 
pdca  aad  tiddfaig  price,  15-16;  deter- 
■M^ioB  of,  by  Hipraisal,  16. 

toavidual;  the  principles  that 
*•"■'•"«.  »44  effect  of  supply 
•ad  demaad.  or  thdr  underlying  force, 
tha  purchasing  power  of  money, 
oa,  145-146;  reciprocal  relation 
purchasing  power  of  money 
aral  Itnl  of.  146  (m«  Price 


levd);  do  not  move  np  or  down  in 
unison,  347-248;  existence  of  am- 
tracts  may  retard  adjustment  of,  348; 
other  restrictions  on  free  movement 
oi,  348-349;  must  therefore  changa 
relatively  to  each  other,  340;  general 
movement  of,  expressed  by  an  index 
number,  349;    the  price  levd  an 
average   magnitude    for  indicating 
general   trend  of  chuigea  in,  34g; 
explauation  of  how  a  price  levd  is 
loesupposed  by,  358-359,  376-377; 
ehmination  of  differences  in,  by  com- 
petition, 360-361 ;  rdations  between, 
and  demand  and  supidy,  361-363 ;  as 
shown  by  d^jiand  and  supply  curves, 
56:;  ff. ;  connection  between  desirabil- 
ity and,  382 ;  fixing  of,  under  monopoly, 
329-330;  mutually  related,  333  ff.; 
leveling  of,  by  arbitrage  transactions, 
333-J3S :  necessary  injury  to  individ- 
uals from  equalization  <rf,  336-337; 
equalisation  of,  as  between  different 
times,    by    speculation,  338-339; 
though  directly  fixed  by  supply  and 
demand  at  a  certain  time  and  place 
are  indirectly  affected  by  the  supply 
and  demand  at  other  times  and  places, 
344-345 ;  of  goods  which  compete  oa 
the  demand  side,  or  sutMtitutes,  344- 
347:   sympathetic  rdations  as  to^ 
between  commodities  and  their  sub- 
stitutes, 34S-346;  of  goods  which  are 
complementaiy  on  the  demand  side, 
347-348;  of  good',  in  series,  350-351; 
in  the  last  analyas  depend  on  compari- 
sons between  satisfactions  or  efforts, 
or  both,  351-353;  rdation  of  rate  of 
interest  to,  as  the  universd  time-piice, 
406-408;  review  and  cUssificaticm  of 
influences  on,  40S-409;  in  case  of 
land,  follow  the  prindples  of  substi- 
tutes or  of  competing  articles,  414. 
Primary  money,  definition,  14t. 
Production,  three  kinds  of  interactiona 
induded  under,  77-78;  transforma- 
tion of  wedth,  78-79;  tranqxirtatioa 
ofwedth,8o;  exchange, or faiteractioaa 
which  change  the  ownership  of  wealth, 
81;  accounu  illustrative  of  faitarao- 
tions  in,  84-88. 
Productivity,  measurement  of  wi^  «i 
laborers  uafnatofluidhyfaitdL 
435-436. 


."5L; 


S«7 


Pndnctivity  theory  <d  interest,  365-369. 

Prafitit  esplsiuttion  of  undivided,  41, 43 ; 
income  in  form  of,  434;  elements  of 
liak  ud  variability  in,  434-433: 
wodmen  whote  wages  come  in  form 
of,  or  employers,  454^435;  comple- 
mentary and  competitive  relations 
between  wates  and,  456-457;  reasons 
why  usually  faiiJi,  te  coapirilM  with 
wages,  457-458- 

Property,  or  property  right,  definition, 
17,  18;  the  real  basis  underlying, 
is  wealth  or  free  persons,  or  botli,  39 ; 
is  the  i»esent  right  to  the  benefits 
of  wealth,  while  wealth  is  the  present 
means  for  securing  future  benefits, 
30-31 ;  confusion  as  to  certificates  of 
ownership  and  real  property  rights  to 
be  avoided,  31-32 ;  table  illustrating 
eadstence  ci  wealth  behind  property 
rights,  33;  problems  of,  including 
double  taxation,  perpetual  ownership^ 
lights  to  bequeath,  etc.,  34-36. 

Protectionism,  doctrine  0^  and  fallacy 
associated  wMi,  t.  Sw  Tlulllb  pt»- 
tective. 

Purchase  and  mi»,  Mton  ol  ^t***!* 

called,  15. 

Purchasing  power  of  money,  the  force 
underiying  the  supply  and  demand  of 
all  artide^  145-146;  reciprocal  rela- 
tion between  price  le/el  and,  146 
(m«  Price  level) ;  causes  which  deter- 
mine^ 151  fi.;  causes  and  effects  of, 
,1848. 


Quantities  of  total  instruments,  property 
rii^ita,  and  benefits,  determination  of, 
410  ff. 

Qiwntity,  measurement  of  wealth  in 
respect  of,  17,  x8, 19. 

Quantity  of  money,  is  only  one  of  three 
factors  in  determining  price  levd,  156; 
fallacy  of  theory  of  any  relati«i  be- 
tween rate  of  interest  and,  356-359. 

Quantity  theory,  that  price  levd  varies 
directly  as  the  quantity  of  money  in 
circulation,  151-153,  x6o;  elucidation 
of,  by  the  equation  of  exchange,  153- 
156;  illustrations  of,  160-164;  resU 
ultimately  upon  the  fact  that  money 
hM  ao  d^dte  niatiaa  to  the  satis- 


faction of  wants  but  only  the  power 
to   purchase  tUnfi  having 
satisfying  poM^ 
S4»-S47> 

Quidci 


"Race  sddde," ' 
475-476. 

Rae^  Jdm,  remedy  for  the  nib  «i  ^ 
suggested  by,  509-510. 

Rsilway  company,  illuatndvt 
acc3(mt  of  a,  71-73. 

Railways,  velocity  cf  dmdMiMl 
creased  by,  301. 

Rapidity  of  turnover,  method  of  deter- 
mining, 153-153;  influence  on,  of 
habits,  systems  of  payments,  density 
of  population,  and  rapidity  of  trans- 
portaticHi,  196-303. 

Rate  of  impatience.   5m  Impatience. 

Rate  of  interest,  definition,  108-104;  a 
meau  of  translating  present  money- 
value  into  its  equivalent  future  money- 
value,  or  vice  terta,  105 ;  avoidance  of 
idea  that  money  is  the  one  and  only 
source  of,  iofr-107;  distinction  be- 
tween interest  and,  107 ;  method  of  use 
for  computing  pcesent  from  future 
values^  107  ff. ;  in  valuatiim  <A  bcmds, 
113-134 ;  effect  of  changing,  on  value 
ai  capital,  135-136;  process  of  deter- 
mining, 354  ff . ;  d^nition  of  explicit 
and  implicit,  354;  quantity  of  money 
has  no  bearing  on,  356-359;  effect  on, 
while  inflation  is  taking  place,  359-361 ; 
ideal  adiustmeat  of,  to  rising  or  f  afling 
prices,  361-363;  avoidance  of  crises 
by  adjustment  of,  363;  ways  of 
securing  better  adjustment  of,  363- 
364;  shown  to  be  the  premium  pe<q>le 
are  willing  to  pay  for  present  enjoy- 
aUe  income  in  tenu  of  future  enjoy- 
aUe  income,  371-374;  influence  of 
differences  in  human  nature  on 
dUtmaoM  in,  375-378;  summary  oi 
the  rix  conditicHU  which  determine, 
400-403 ;  exsmples  61  Holland,  Scot- 
land, England,  and  Ftance  n.  CUna, 
India,  Java,  etc.,  dted  to  illustrate 
statements  as  to,  404-406 ;  shown  to 
be  the  universal  time-price,  by  ^ 


INDEX 


•eeooBta  looMd.  406-408;  itgmi- 

«n  of  «MH  i^ga,  44a-443. 
Kate  wM,  wdMoM  maktaf  in  a. 

3i7-3»:  bo»lmaghttoaand,3a3. 
K«d  MUte,  dritaWciw  ffawHinitloii 

of.  10;  tbt  iMMt  — ^nwHt  ol 

commodhiw,  (47. 
^***r***^i  'MhIm  lliip^ntirmi  fffiHiBl- 

bf  officdtkmpafMo  aad,  40^  so-51, 

93-98. 

Keodpte  and  diibuHemanU,  dfect  of 
outoms  ngudiiift  on  ydodOm  of 
dRnlatkn.  xgo-soi. 

Knt,  dafidtkn.  4iM;  attifbaln  of 
opBctt  aad  impRcit,  413-413;  of 
had.  413  f.;  rfuilaiity  of  waces and, 
4M-VI36;  tMdanqp  of  kad  to 
ili^46i. 

MMit^pndmm,  device  to  cfacoamnt 
pwUhMon  of  asmy,  397. 

lUmnn,  caA,  in  iia^jnc^  176-178. 
&i  Bank  mervea. 

BiranHan  doctrine  of  the  "margiual 
•oe,"  413-418. 

Bl^  to  iMoeto  of  fpealtli.  S6-30. 

Xfak,  deoMnt  of ,  to  be  conridered  in 
ntomiiiiiit  c^dtal-valae,  138-^40; 
inSaanee  ti,  on  late  of  interest,  383- 
tfSj  nloment  of,  in  dividends  and 
pnftts  foms  of  incooK  bom  capital, 
494-435;  stockholders'  aisamption 
<t  4S5-4«6;  implies  a  laiser  though 
■on  inotuating  income,  426;  methods 
of  aivoidance  of,  hf  increasing  luiowl- 
of  the  fotoR,  y  employing 
■^■■onb  against  mischances,  by 
fawws^and  by  hedging,  427-^32; 
tm  naoBftaking  of,  distinguisies  em- 
piogwa  fNm  anployees,  455;  snter- 
prfMMNHtaHatswho  assume,  are  caUed 
"cyntaa  of  todustry,"  4S9-460. 

Koning  coats,  13-324;  at  bottom  are 
■milar  to  fined  coats,  316;  division 
into  general  costs  and  particular 
co««,3a6-3a7. 

itoaa  oa  huiM,  187^x88. 

S 

Sncrifitad  dcrfnURty,  196. 

Saiaty  dmicM,  as  a  MMa  of  ndacfag 

ilsk.4s8. 

Salaries,  no  real  distiaeliaa  botmen 
WHO  and,  433  n. 


Sih^  BMthod  of,  for  modifying  income- 
stfsom  or  equalizing  marginal  rates 
of  impatience,  394-306 ;  loans  viewed 
as  sales.  394-39S :  s  means  of  cir- 
cumventing pnhftMoaa  of  Jatmat, 
396-397. 

Satisfactions,  or  consumption,  form  tha 
ultimate,  uncanceled  item  of  tha 
income  account,  77,  9»-9fc  I4>.  407, 

35J-3S3 

Savings,  or  appreciation,  134-135;  oitct 
of,  on  \f sges  and  hours  of  woMngmoi^ 
438. 

Schedules  of  demand  and  supply,  361- 

a63.  303-306. 
Scotch  and  Irish  compared  as  to  im- 
patience and  thenion  as  to  rate  of 

interest,  376. 
Sea-water  gold,  »s6. 
Seigniorage,  definition,  Itt-lU,  110. 
Self-control,  and  rate  of  interest,  376; 

countries  which  lack,  and  where  high 

interest  rates  prevail,  404. 
"Selling  short,"  operation  known  as, 

339-341;  as  a  devioe  for  ndacfaf 

risk,  430-433. 
Series,  prices  of  goods  in,  350-391. 
Services,  definition,  IS. 
Silver,  is  fidudaiy  awaqr,  149.  Sm 

Bimetallism. 
Single-tax  theory,  413. 
Slaves  considered  as  wealth,  10. 
Slow  assets,  definition,  49. 
Socialism,  question  of,  in  sdution  of 

economic  problems,  35-36;  theoiy  of 

interest  according  to,  369-371. 
Sodal  racing,  500-511. 
Socblogy,  economics  a  branch  of,  514. 
South  America ,  effect  on  trade    lack  of 

business  confidence  illustrated  by,  195. 
Space,  measurement  of  wealth  by,  ii-ia. 
Speculation,  function   of,  to  equalise 

prices  as  between   (Afferent  dmes, 

338-  339;  two  chief  kinds  of,  as 
represented  by  operations  of  "bulls" 
and  "bears,"  339;    "jieUing  short," 

339-  341:  limitations  on  profit  from, 
341-343;  item  of  interest  to  be  omsid- 
ered  in,  342 ;  uncertainty  of,  may  lead 
to  aggravation  of  inequality  of  prices 
instead  ol  equalizing  them,  342-343; 
unwise  and  injudidoiu  character  of 
much,  343-344;  so  far  as  qiecuUtion 
is  good,  it  tends  to  egualiae  prices  ia 


IHDEX 


539 


tiiM,  344;  mi^kfmmft  ti,  tendon 

risk,  430-43a- 
Spendinc,  equaiisadon  of  ntM  Of  impir 
tience  by,  394-396;   (iiflnitlmi  tt, 
SM;  ■uUlbwIi im wtm  Immtlu  iili 

395-396. 

Stondud  gold,  dnftiririon,  11. 

Standardintion,  of  income,  67-691  136- 
138;  land  not  capable  of,  4x4* 

Statutes  of  mortmain,  49a. 

Stock  dividend,  inue  of  stock  called,  43. 

Stockhdders,  in  joint  stock  company, 
41 ;  of  banks,  174;  risk  of  investment 
of,  contrasted  with  comparative  safety 
of  bondliolders,  425-426;  assumption 
of  riik  by,  implies  a  larger  though 
more  fluctuating  income,  436;  rela- 
tion between  empbyers  and  wage- 
earners  analogous  to  that  between 
stockholders  and  bondholders,  455, 
457- 

Stock  jobbing,  explanation  of,  46-47. 

Stock  of  goods,  defjwirtoii,  ST;  ovbal 
Cuasists  of  a,  38. 

Stock  watering,  46-47. 

Substitutes  on  the  demand  dde,  defini- 
tion, S4S;  influence  of  prices  of,  on 
commodities  themselves,  345-347 ; 
ajrmpatheric  rdations  edstent  among 
prices  of  fuel,  food,  clothing,  etc., 
substitutes,  346;  substitutes  on  the 
supply  side,  definitiim,  S*t-SM; 
prices  of  bad  foBow  the  pdacipfe  of, 

414- 
Sunk  cost,  324. 

Supply,  schedule  of,  262-263,  303-306; 
relations  between  demand  and, 
represented  by  curves,  263  S.,  303- 
306;  shifting  of,  268^277;  the 
influences  behind,  303  S. ;  marginal 
undesirability  or  cost  to  be  conadered 
in  connection  with,  305 ;  cases  where 
rise  of  price  results  in  reduced,  3x3- 
314;  conditi<His  of,  which  result  in  a 
rate  war  or  "cutthroat  competition," 
314-32T ;  tendency  toward  monopoly 
resulting  from  competition  in,  321- 
322;  fixed  and  running  costs  in  con- 
nection with,  323-326;  found  to  rest 
in  the  ultimate  analysis  on  efforts, 
351-353- 

Supply  and  demand,  disrusaon  of  the 
phrase,  144-145;  concealed  reference 
to  the  purchasing  power  of  money 


imilM  by.  ttes  the  aktaMta  iMtom 
of,  an  dtato  nd  H#>clh«»  SS»> 

3S3. 

Supfily  at  •  iMa  Pikih  ■■■■iat  «■ 

s6x-a6a. 
Supply  conra,  diirfliaa>  Mf. 
Supply  s^edvk^  diMllai^  Ml, 
Surplus,  dthiMoB,  4t;  hdiM  Anto 

to  illmtratt,  4a. 
Suiplut  deafaaUHty.  sM-iA  W  »^ 
Switaeriaad.  Inpi  pw  atkm  wnMh  d, 

470. 

Systems  ol  pajn—rti,  twftimn  tm 
velocity  of  ilicMlaHflB  tad  OMfon 
on  piioii^  tf^tUt 

T 

Tariii,  pratective,  effect  of,  on  ytkmm 
of  trade  and  on  prices,  ig4r-iM>  <l*et 
on  quantity  of  aooay  tod  oa  pdemt 
207-208;  ar.  iatafiMBa  nitk  tht 
equaUiatioB  of  prioM^  S3*i  •■■ioiy 
between,  and  the  mamuuA  apiMk 
labor-saving  machinery,  337;  fk  OM 
aspect  an  offspring  of  the  wak^^itA 
faUacy,  453-454- 

Taxation,  double,  34;  sohdioai  of 
difficulty  of  double,  57-S&. 

Telegraidi,  vdodty  of  drodattou  «l 
dqcMsiu  increaiid  by  tin,  aet-aet. 

Thrift,  dependence  of  a  Batjan'SMOHHi- 
lated  producu  on  qodky  «(>  4<»; 
i«le  played  by,  in  the  tttrfb«tfM  «i 
wealth,  480-481. 

Time,  influence  of,  ai  coBcema  iacQa»> 
stream,  on  impatiaan  aad  tka  ttt»  ol 
interest,  379-381. 

Tobacco  as  m<»ey,  i47>  X4Q. 

Total  desirability,  283-285. 

Trade,  a  gain  should  result  to  both  Mm 
in  a,  297.  See  Volume  of  trade. 

Trade  journals,  functfca  of,  to  iaCMM 
knowledge  of  the  future  aad  tkoa 
reduce  risk,  427. 

Trade  schools,  increasing  efficiency  ol 
labor  by,  448-449- 

Trade-imions  and  rate  of  wages,  444. 

Transfer  of  wealth,  definition,  14;  oa>> 
sided  and  reciprocal,  14:  <>  <>a 
action  which  daagw  tha  ommM^ 
of  wealth,  8^. 

Transformation  of  wealth,  the,  77-7S; 
vaifanis  stages  of ,  to  be  ilawad  at 


S30 


nracx 


costs  or  benefits  and  debited  or 
credited  accordincly,  7^g. 

Transition  period^  causes  and  effects 
<d  purchasing  power  ol  money  during, 
184-191;  rate  of  interest  and  its 
adjustment  during,  359-363. 

Transportetion,  definition,  80;  effect  U 
facilities  for,  on  conditions  affecting 
trade,  193,  194 ;  influence  of  rapidity 
of,  on  velodtiea  of  circulation  and  on 
prices,  aoi-aoa;  effect  o*  heq>  and 
rapid,  on  tiwHwtfcio  of  r,  ^  j^f- 
337. 

Trusts,  issue  of  stocks  bonds  by, 
tends  to  raise  price  levet,  303 ;  gtcwtb 
of,  due  to  necessity  of  jwotection 
against  competition,  331. 

Turnover.  Su  Rapidity  of  turnover 
and  Velocity  of  diculation. 

U 

Uncertainty  of  income,  influence  of,  on 
impatience  and  the  rate  of  interest, 
383-3^5 ;  relative  positions  of  bond- 
holders and  stoddidders  as  to,  434- 
4»7i  reduction  of,  by  increasing 
knowledge  of  the  future,  by  employing 
safeguards  against  mischances,  by 
insurance,  and  by  hedging,  437-433. 

Undesirability,  mMrgti^n^  See  Mars^nal 
cost. 

Undivided  profits,  definition,  41,  41. 
Unearned  increment,  increase  in  land 

value  due  to  no  labor  00  owner's 

part  called.  418^419;  omQjr  a  case 

of  luck,  481. 
Units  of  measurement,  accuntqr  of,  ao-si. 
Uses,  benefits  rendered  bf  tUngs,  33. 
Utility,  quality  of.  impKid  b  mnMOUp^ 

3U.  See  DcsinbOity. 

V 

Value,  definition,  17 ;  money  at  a  meanm 
of,  18-19;  risk  in  measuring  amount  of 
wealth  by,  18-19;  difficuhiet  of  finding 
right  way  for  MMariBt  vakw  of 
wealth,  19-ao. 

Values,  book  and  madtet,  44-45. 

Vanity,  a  motive  for  socially  injurious 
rivalry,  503-506;  dse  of  tax  laid  by 
Mde^  i9on  itieU  owing  tOb  so6-se8; 
MMdht  fof  ««i  «(,  ia  Og  inqr  d 


"sodal  disaTx^ment,"  oomimUai 
government,  ipiudng  faiUoa  to  I 
in  more  useful  '^^^^n|^fl^^  gtc,  jo|  « 

Variabdity,  elament  of,  in  dMdndi  1 
profits  forms  of  income,  4a4-4as. 

Vuiations  of  income  in  rdatioa 
capital,  137  ff.;  effects  of  interest  1 
crued  and  interest  taken  out,  137-ij 
appreciation  and  depredation,  ij 
136;  Insetting  variations,  by  d^ 
elation  fond  and  other  davion^  ij 
i3>;  th»  ifak  iliMiHt.  or  cjiaae^  ij 
X39. 

Variety  ol  human  wants,  effect  «i, 
vdume  of  Uadi  and  pricaa,  19s,  n 

Velocity  of  drculatioa,  de^Moo.  U 
how  determined,  152-15  ';  influM 
on,  of  individual  habits,  cystema 
payments,  denai^  ol  popglatian,  m 
ntt^^  y  of  tnuportatiaa.  xg6-M 
an  '  *se  of  money  shown  not 
dectMue,  342-347. 

Vitality,  increasing  effidoiqr  of  laban 
by  improvement  piiyiical  ai 
mental.  446-448. 

Volume  of  trade,  fafliMHK^  wUdi  ain 
in  the  way  of  various  conditiaBf  afac 
lat  pnduon  aad  oaasnmen,  xgt  fl 
as  aa  avatage  gngaitada  for  ia^catfc 
general  txttd  of  dMMisa  in  qnatitii 

* 

W 

Wages,  raising  of ,  by  n  pratoctivt  tan; 
3o8>  453-454:  neceadty  of  oomdiv 
in  comparisons  of,  for  dMrnaoH  i 
price  kvds,  300;  cases  lAire  a  rin  fa 
resuka  in  decreased  nqwijr,  319-31^ 
436-438;  competitioa  of  oorta  mni 
trated  by  tendency  of,  to  koap  pat 
with  each  other,  348-340;  diiM 
a8theinoonM{ramUar,4ss;  a^Bd 
■ad  fagmHdt,  433:  trta  <<,  d^imifM 
on  tha  kbom't  padiictltftar,  431;  n 
omaritiw  af  kbce  * 

work  loifsr  horn,  438;  Mt  mMoi 
diacoonted  in  otdv  to  mmtA 
laborer's  capitai-vataa  aad  m  mUm 
regarded  in  Hgfat  of  fartomt  oa  hi 
a«ital-valM^  43>-439;  ««  alway 
MdEoaod  aa  vom  aad  nam  as  nil 
mt  Mmmum  botwaau  mviy  0 


I  aad  that  of  other  iiutro- 
aaati,  439-440;  rthciiMfan  of,  from 
the  catplogrer'B  viewpoint,  440  ff. 
a  marginal  unit  of  work  aa  a  banncter 
of,  441 ;  are  the  diacountad  value  of 
the  future  benefita  the  employer 
laocivea,  and  are  dependent  upon  the 
rate  of  intereet,  441-441;  effect  of 
trusts  and  tiade-uniona  on, 
both  competitive  and  complenientary 
idationa  between  profita  and,  456-457 ; 
in  general,  profita  are  much  higher 
than,  457-458- 
Wants,  effect  of  extent  and  variety  of, 
on  cxmditioos  affecting  trade,  194 
the  real  foundation  of  demand,  300- 
jot. 

War  and  preparatiaa  for,  economic 

waite  represented  by,  501. 
Wealth,  broad  and  nanowdefinitiona  of, 
S;  dgaiflfance  ol.  in  commoo  parlance 
aad  hi  economic  umge,  4;  distinction 
between  money  and,  5-9;  dasstfica^ 
tka  of,  into  rnl  estate  and  commodi- 
tiM  aad  their  subdivisions,  9-11 
:of,  II  ff.;  attribute  of 
providing  a  basis  for 
by  weight,  space,  and 
number,  ii-ia;  necessity  of  homo- 
■endty  of,  in  measuring,  is;  attri- 
bntea  of  ,  not  to  be  regarded  aa  separate 
aad  independent  kinds  of,  13 ;  transfer 
e^  it  a  diange  of  ownenhip^  14;  ex- 
dinge  of;  a  pair  of  oratual  lad  volun- 
taqr  tniailw»  14;  price  tl,  defined, 
14-15;  money  means  wealth  generally 
aooeptable  in  eirhangr,  15;  vidua 
•f  a  given  quantity  of,  define^  tftot 
"  ' :  of  accuracy  in  measureoMats  of, 
the  benefits  of,  33-flS;  the 
of,  ss-a6;  pnparty  to 
taiey  benefiu  of,  a6-*n  to  b»  » 
•Bided  as  the  present  aana  far 
fitture  benefits^  30-31;  car- 
between  property  ti^ita 
•ad,  3t;  table  illuatrating  eiiatence 
ft,  bddnd  property  rightly  33;  Gon- 
ial cvilil  aad 


to,  3*:  vahtt  aad  diatrlbatlon  of,  tai 
America,  59;  deposit  banking  a  device 
for  facilitating  circulation  t',  165-171 ; 
the  concrete,  taagMa  wealth  of  the 
world  which  fanaadMfcaria  of  ciicdte> 
ing  credit,  171-174;  probkma  of 
poverty  and,  464  ff  ■ ;  the  distributioa 
af,465ff.:  consideration  of  the  wealth 
of  natioaa,  and  00  what  it  depend^ 
467-469;  per  capiu  wealth,  469  ff.; 
increase  of  national,  and  increase  or 
decrease  of  per  capita,  depend  on  ratio 
between  populatioo  aad,  470-471; 
view  of ,  aa  a  means  of  attairiag  aoetal 
poaitioa  leada  to  decreaae  la  faiith  lata 
among  the  wealthy,  49a-476;  i»> 
equalitica  b  diatiibatiaa  tt,  mttm 
individual^  47^47S;  1W«  ladt 
to  the  growth  of  intfvMaal,  j8*- 
486;  the  cyde  of,  4lh-4lht  IM* 
nd  customs  as  to  Inhiiltaaet  4^  aad 
>  'ect  on  dlstribatfaat,  m-mi  the 
Uje  worth  of,  aa  eeapaNd  with  At 
marint  wwth,  40«n49r:  daagsraaad 
evils  coaaectad  with  pemirioe  of 
extreme,  499-^;  tona  cf,  iMdk 
injure  the  owner,  4«»^:  fanat  d, 
injurious  to  aodaty  a  iriHia^  499- 
soo;  forma  of,  laad  far  aodal  livalqr, 
of  wUsk  eauaplas  an  waifan  aad 
pceparatfaaa  far  war,  catthroat  caai> 
petitioa.  aad  rivahy  fa  weaUi  Karil 
to  fnH^  vaaitjr,  jbo  jo6. 
Wd^  meaaonmal  af  wmU  W.  nt 
the  pound  sfarihv  aad  Mhr  « 
odtao^ii. 
White  Java  tiaflc;  cmmh  «4 
to  aaaqnal  ""^"^Inrtliia  «l 

WOfaTum  n«Bidh«  aad  aanolM  «f 

curiooa,  491-493. 
W«tk.baaaifanaMlgrl 

Wap«acali4t3« 
woniaa  aoun^  lacNaae  la ' 

447-44». 


MaaihilhalMiallMassrAMiin. 


